How to calculate IRR

The internal rate of return is the discount rate that makes the NPV zero: the project’s own yearly return.

Problem

A project costs $50,000 today and returns $12,000, $15,000, $18,000 and $20,000 over the next four years. What is its IRR?

Keystrokes

fREGCLx
0.00
Clears all registers.
50000CHSgCFoPV
−50,000.00
The initial cost.
12000gCFjPMT
12,000.00
Year 1.
15000gCFjPMT
15,000.00
Year 2.
18000gCFjPMT
18,000.00
Year 3.
20000gCFjPMT
20,000.00
Year 4.
fIRRFV
10.41
The internal rate of return.

Answer

The IRR is 10.41% a year. It’s above 10%, which matches the small positive NPV at 10%.

Why it works

There’s no formula for IRR, so the calculator searches for the rate that makes the NPV zero. It may take a moment with many flows. When it’s done, the rate is also stored in i, so fNPVPV right after gives zero.

When IRR misleads

If the flows change sign more than once, for example a big cost partway through, there may be more than one IRR, or none. In that case the calculator can be pointed at a different answer: key a guess, then RCLgR/S. NPV at your required rate is the safer measure.

Questions

What if the flows are monthly?

The IRR is then per month. Multiply by 12 for a nominal annual rate.