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What is IRR?

posted October 28, 2009 - 11:19pm
What is IRR?

IRR or Interest rate of return is a measure of investment. This tool can support Net Present Value (NPV) analysis. The analysis can help us to determine whether the investment is good or not.
 
Unlike NPV, IRR does not find the value of investment but it finds an interest rate which make NPV value zero.
 
NPV = casflow + cash inflow/(1 + r) n 
 
Finding IRR is difficult. You need financial calculator to do it. If you have no calculation you can use trial and error method. The calculation will be difficult especially multiple years IRR calculation.
 
NPV = cash inflow + cash inflow/(1+r) + cash inflow/(1+r)2 +...+ cash inflow/(1+r) n
 
IRR is also useful for evaluation projects. The project should have reliable IRR that means the project owner could settle the investment.
 
IRR weakness is the interest measure use the rate that sometimes rise up or down and this analysis is dependant to NPV.

Author: Chapter
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