Calculate IRR from Cash Flows
How to Calculate IRR from Cash Flows
Internal Rate of Return (IRR) is a key metric in finance, used to estimate the profitability of an investment. It’s the discount rate at which the net present value (NPV) of a series of cash flows equals zero. Calculating IRR from cash flows helps in decision-making, comparing investments, and valuing projects.
- Enter cash flows (positive for inflows, negative for outflows) separated by commas.
- Enter the discount rate.
- Click ‘Calculate’.
The IRR formula involves trial and error to find the discount rate that makes the NPV of cash flows equal to zero. Our calculator uses the Newton-Raphson method for iterative approximation.
Case Study 1: Solar Panel Investment
Initial investment: -$10,000, Cash inflows: $2,000, $3,000, $4,000 over 3 years. Discount rate: 10%. IRR: 15.23%
| Investment | Cash Flows | Discount Rate | IRR |
|---|---|---|---|
| Solar Panels | -10000,2000,3000,4000 | 10 | 15.23 |
| Wind Turbine | -15000,3000,5000,7000 | 8 | 18.54 |
- IRR assumes reinvestment at the same rate.
- Use modified IRR for projects with different cash flow timing.
- Consider other metrics like NPV and payback period for comprehensive analysis.
What if cash flows are irregular?
Use the XIRR function in Excel or Google Sheets for irregular cash flows.