Internal Rate of Return (IRR) Tutorial
IRR formula for single cash flow:
Here, represents the Internal Rate of Return. reflects the cash flow that occurs at time , and denotes the initial investment.
IRR formula for multiple cash flows (using interpolation):
Here, represents the Internal Rate of Return.
represents the positive Net Present Value that is obtained by using a discount rate .
represents the negative Net Present Value that is obtained by using a discount rate .
The IRR formula here uses interpolation, relying on the fact that the IRR is the point at which NPV is equal to 0.
IRR formulas on Excel®:
IRR Use Cases
The IRR is relevant for:
- Capital Budgeting / Investment Appraisal
- Estimating the Yield to Maturity (YTM) of bonds
- Video tutorial on NPV: Net Present Value (NPV) Tutorial
- Course on Investment Appraisal / Capital Budgeting: Investment Appraisal Course