Internal rate of return – IRR
Internal rate of return – IRR, %
The discount rate at which the total present value of income from investments is equal to the value of these investments. IRR is calculated as the discount rate at which NPV = 0.
To find IR
, the program uses a cyclic algorithm with an accuracy of 10-2
percentages, the calculations use the discount step specified by the user (month, quarter, year).
defines the maximum cost of the attracted capital, at which the investments in the project remain profitable:
- when NPV > 0, in this case IRR > r;
- when NPV < 0, in this case IRR is not defined;
- when NPV = 0, in this case IRR = r.
Calculation of the algorithm ends when the IRR value is 1000%. Also, in the case when ∑CFn (1 + r)-n = 0
or ∑In (1 + r)-n = 0
, IRR is not calculated.
Internal rate of return is the second indicator after NPV
, on the basis of which the attractiveness of investments is determined.
☛ Note that only the net cash flow (NCF) is used to calculate the internal rate of return of IRR and the modified internal rate of return of MIRR. Also, the result of calculations is influenced by the discounting step chosen by the user.