Internal rate of return irr method

Investment appraisal is carried out with the aid of various financial measures to find an investor's return on investment. Here, we will explore and explain IRR which is one of the DCF techniques used for analyzing investments. A definition of IRR will be given, followed by a formula that is later used in an example calculation to find the IRR.

Spreadsheet programs are commonly and often used for financial analysis and in this respect you will be informed about the availablity of a IRR spreadsheet function called tadIRR. The tadIRR function may be typed in to a worksheet cell of various offline and web based spreadsheet programs. Excel, OpenOffice calc, LibreOffice calc, IBM Symphony spreadsheet, Office 365 (Web version), and Google Docs spreadsheet are some of the popular spreadsheet programs that support the use of tadIRR to find IRR.

The e-Book

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The contents of the e-Book

This discussion and exploration of IRR is offered to our web visitors as a PDF download. The e-Book contains a thorough discussion of the IRR method to analyze investments. The discussion begins by defining the IRR method and moves on to example calculation using formulas.

IRR formula

When for the first time you are asked to find internal rate of return for an investment, you are likely to seek a mathematical formula that can help find the IRR. But as you would learn the hard way there is no such thing as IRR formula or at least not a direct IRR formula. Instead there are various ways one can find the IRR such as using a rather trivial approach called the linear interpolation formula. But this is a mere approximation of the actual IRR which is to be found by using more complex methods referred to as numerical methods.

IRR equation

But to make use of such iterative methods one would have to first agree at selection of the IRR equation. The eBook enumerates and shows four different IRR equations that may be used for the iterative calculation of internal rate of return. The following four definitions of IRR will be used to show you the different IRR equations.

1. At IRR the NPV = 0
2. At IRR the NFV = 0
3. At IRR the financial PI = 1
4. At IRR the TVM = 0

The above mentioned equations define IRR as the interest rate at which net present value and net future value is zero. The profitability index is one and the time value of money equation is set to zero.

List of iterative methods

The eBooks refers to you to other sources that detail the IRR calculation using the one of the following many iterative methods or the numerical methods.

1. Finding IRR with NPV equation using Newton raphson method
2. Finding IRR with NPV equation using Modified Newton raphson method
3. Finding IRR with NPV equation using Mullers method
4. Finding IRR with NPV equation using Secant method
5. Finding IRR with NFV equation using Newton raphson method
6. Finding IRR with NFV equation using Secant method
7. Finding IRR with Profitability index equation using Newton raphson method
8. Finding IRR with Profitability index equation using Modified Newton raphson method
9. Finding IRR with Profitability index equation using Secant method
10. Finding IRR with TVM equation using Newton raphson method