Internal rate of return (IRR)

What is internal rate of return?
The IRR is essentially the interest rate that makes the NPV value of all cash flows equal zero. It represents the return a company would earn if it expanded or invested in itself, rather than elsewhere.

The internal rate of return used in time value of money calculations cannot be directly found by formula. It can be approximated by trial and error, but in the real world it is simply found by inputting present value, future value, and the number of compounding periods into a financial calculator. (To learn more, see What's the difference between net present value and internal rate of return?)


Uneven cash flows
The uneven cash flow method is used to calculate the annual payments needed to fund future college tuition costs. This method employs the cash flow keys on a financial calculator to determine the present value of the cost of college tuition over the period of attendance, usually four years.

The two steps:

  • Calculate the present value of the cost of tuition over the four-year period.
  • Calculate the annual payments that must be made to fund those costs.

Serial payments
A serial payment is a payment that increases at a constant rate. An example would be an employee who contributes a set percentage of salary each pay period to a 401(k) plan. Assuming the employee receives annual pay increases and maintains the same contribution percentage, the employee's 401(k) contribution is a serial payment that increases each year.

Another example of a serial payment is an annuity payment that increases regularly according to a set percentage, possibly to provide a hedge against inflation.


Registration and Licensing

Related Articles
  1. Investing

    Return on Investment (ROI) Vs. Internal Rate of Return (IRR)

    Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI).
  2. Managing Wealth

    How to Calculate the Value of Annuities

    Here's everything you need to account for when calculating the present and future value of annuities.
  3. Managing Wealth

    Serial Entrepreneurs Venture And Venture Again

    Serial entrepreneurs start up a venture, sell it, and start another one, and they often benefit from their previous experiences.
  4. Markets

    Internal Rate of Return Formula for Excel

    The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment.
  5. Investing

    Capital Budgeting: Which is Better, IRR or NPV?

    Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense.
  6. Trading

    Understanding Internal Rate Of Return

    Internal rate of return, or IRR, is one of the most popular methods of evaluating potential projects. Learn more about this important metric.
  7. Investing

    An Introduction To Capital Budgeting

    We look at three widely used valuation methods and figure out how companies justify spending.
  8. Markets

    Calculating the Present Value of an Annuity

    The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate.
  9. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  10. Managing Wealth

    How To Measure Returns On The Series 65 Exam

    An investor who is evaluating the performance of a portfolio manager must take into consideration the impact that any contributions or withdrawals made by the investor will have on the overall ...
Trading Center