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Finance & Business · pattern A, Numeric fields

Internal rate of return for a level cash flow.

Enter the outlay, annual inflow and project life to find the rate at which NPV becomes zero, with the margin over your cost of capital.

Inputs

The formula used

IRR is the rate r for which NPV = 0

There is no closed-form solution, so the rate is found numerically by bisection — which is exactly what a spreadsheet's IRR function does.

Internal rate of return

12.3762 %

Total undiscounted inflow
70,000.00
NPV at your cost of capital
3,071.01
Margin over the hurdle rate
2.3762 pts
Decision
accept — IRR exceeds the cost of capital
Payback period
3.571 years
Inflow needed for a 15% IRR
14,915.78

IRR is a rate, and rates hide scale.

A small project with a 40% IRR can create less value than a large one at 15%, because IRR says nothing about how much capital is deployed. It also misbehaves on cash flows that change sign more than once, where several rates can satisfy NPV = 0. Where IRR and NPV disagree, NPV is the reliable criterion.

Questions about irr

Can there be more than one IRR?
Yes, when the cash flows change sign more than once. The polynomial has multiple roots and none of them is uniquely the answer.
How does a spreadsheet compute IRR?
By iterative search from a starting guess, exactly as here. If the guess is poor it can fail to converge, which is why Excel occasionally returns an error.
When does IRR mislead?
On projects of very different sizes or durations, and on non-conventional cash flows. Use NPV as the primary decision rule.

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