0
This internal rate of return calculator (or the IRR calculator for short) is a helpful tool for determining whether a future investment will be profitable for you. As this metric is not always easy to understand and apply correctly, we prepared this handy guide to explain in detail how to calculate the IRR. We will also provide you with an IRR formula that illustrates the underlying principles.
By definition, an internal rate of return (IRR) is the interest rate at which all cash flows associated with a particular investment have a net present value equal to zero. In other words, a project's IRR is the discount rate that makes the present value of the expected future cash flows equal to the initial investment.
Practically, such an interest rate guarantees that the money you would invest in such a project today will earn you precisely $0. You will neither win nor lose if you chose this investment - the only consequence will be your money has remained constant.
Why can estimating this particular value be helpful for a person dealing with finances? The reason is that the IRR corresponds to the project's rate of return. If this return exceeds the cost of the funds (for example, cost of a loan or APR) employed to finance the project, then the difference might be a helpful approximation for the profitability. On the other hand, if the IRR is lower than the cost of capital, the project is possibly unproductive.
The same concept applies to the yield to maturity (YMT), where the discount rate forces the present value of the cash inflow to equal the price of the bond if you hold the bond to maturity. In both cases, the analysis of what is the time value of money constitutes the bottom line for the calculation.
