IRR Formula

The IRR formula calculates the discount rate that makes the net present value (NPV) of cash flows equal to zero. This formula is essential for determining the internal rate of return, allowing investors to assess the potential profitability of investments. IRR is a critical tool in finance, particularly for comparing different projects or investments with varying cash flow patterns.

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Formula:
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Internal Rate of Return (IRR) = (Future Value ÷ Present Value)^(1 ÷ Number of Periods) – 1

• Calculates the discount rate where NPV equals zero.
• Determines the internal rate of return.
• Crucial for assessing investment profitability.
• Used in comparing projects.