Enter an initial investment and the cash flow generated from that investment in each of the following years (up to 5 years) to calculate the internal rate of return.

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## Internal Rate of Return Formula

The following formula is used by the calculator above to calculate the internal rate of return of an investment.

*r = ( x(t) – x_{0})^^{ 1/y}– 1*

- Where r is the internal rate of return (%)
*x*(*t*) –*x*_{0}is the final value – the initial investment- y is the total years of the investment.

It’s important to note that the total final value is equal to the initial investment plus the cash flow each year. This means that this equation can further be simplified into the following:

r = (*x*(*t*))^^{ 1/t} – 1

- Where X(t) is the total cash flow generated by the investment.

## Internal Rate of Return Definition

The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of an investment. It represents the discount rate that makes the net present value (NPV) of the investment equal to zero. In other words, it is the rate at which the present value of cash inflows equals the present value of cash outflows.

IRR is crucial because it allows investors to evaluate the potential profitability of an investment project.

By comparing the IRR of various investment opportunities, decision-makers can identify the most favorable options. A higher IRR indicates a more attractive investment, as it implies a higher rate of return on the initial investment.

Additionally, IRR helps in determining whether an investment is financially viable. If the IRR is greater than the required rate of return or the cost of capital, it suggests that the investment will generate positive returns. If the IRR is lower than the cost of capital; the investment may not be economically feasible.