1. What is IRR?

The Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of potential investments. It is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

2. How Does the Calculator Work?

The calculator uses the linear interpolation formula:

Where:

• \( L \) — Low discount rate (%)
• \( H \) — High discount rate (%)
• \( NPV_L \) — Net Present Value at low rate ($)
• \( NPV_H \) — Net Present Value at high rate ($)

Explanation: This method approximates the IRR by linearly interpolating between two discount rates where the NPV changes sign.

3. Importance of IRR Calculation

Details: IRR is crucial for investment decision-making, capital budgeting, and comparing the profitability of different investment opportunities. A higher IRR generally indicates a more desirable investment.

4. Using the Calculator

Tips: Enter two discount rates (L and H) and their corresponding NPV values. Ensure that NPV_L and NPV_H have opposite signs for accurate interpolation.

5. Frequently Asked Questions (FAQ)

Q1: Why use linear interpolation for IRR?
A: Linear interpolation provides a quick approximation of IRR when exact calculation is complex, especially useful for manual calculations.

Q2: What are typical IRR values for good investments?
A: Generally, an IRR higher than the cost of capital or hurdle rate is considered acceptable. The higher the IRR, the more attractive the investment.

Q3: When should I use IRR vs other metrics?
A: IRR is best used alongside other metrics like NPV, payback period, and ROI for comprehensive investment analysis.

Q4: Are there limitations to IRR?
A: Yes, IRR assumes reinvestment at the same rate, may give multiple solutions for unconventional cash flows, and doesn't consider project scale.

Q5: How accurate is this interpolation method?
A: The accuracy depends on how close the two rates are to the actual IRR. Closer rates with opposite NPV signs yield better approximations.