Financial modelling terms explained

# Internal Rate Of Return

The internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows from a project equal to zero. In other words, it is the interest rate that sets the present value of the initial investment equal to the present value of the cash flows from the investment.

## What is Internal Rate of Return?

Internal Rate of Return (IRR) is the rate of return that makes the net present value of cash flows from a project or investment equal to zero. It is a measure of the profitability or yield of a project. The higher the IRR, the more profitable the investment. The IRR can be used to compare different projects to see which is the most profitable. It can also be used to determine whether a project is worth undertaking.

## How Do You Calculate Internal Rate of Return?

The Internal Rate of Return (IRR) is the rate of return that makes the net present value of a cash flow stream equal to zero. IRR can be calculated using a financial calculator or a spreadsheet. To calculate IRR using a financial calculator, you need to know the cash flow stream, the number of periods, and the initial investment. The steps to calculate IRR are:

1. Input the cash flow stream into the financial calculator.

2. Input the number of periods into the financial calculator.

3. Input the initial investment into the financial calculator.

4. Press the IRR button on the financial calculator.

5. The financial calculator will display the IRR.

To calculate IRR using a spreadsheet, you need to know the cash flow stream, the number of periods, and the initial investment. The steps to calculate IRR are:

1. Input the cash flow stream into a spreadsheet.

2. Input the number of periods into a spreadsheet.

3. Input the initial investment into a spreadsheet.

4. Use a function in the spreadsheet to calculate IRR.

5. The spreadsheet will display the IRR.

## Who Uses Internal Rate of Return?

The internal rate of return, or IRR, is a financial metric used to determine the profitability of an investment. It is calculated by finding the discount rate at which the net present value of all cash flows from the investment equals zero. IRR is used by a variety of people in the investment world, including individual investors, financial analysts, and portfolio managers.

## What Do You Have to Watch out for When You're Performing Internal Rate of Return?

There are a few things to be aware of when performing an internal rate of return calculation. One is that the calculation assumes that all cash flows are reinvested at the internal rate of return, so it's important to make sure that the cash flows are reasonable and that there is no significant cash flow outlay near the beginning or end of the period being evaluated. Additionally, the calculation can be sensitive to the timing of the cash flows, so it's important to be precise in estimating when the cash flows will occur. Finally, it's important to note that the internal rate of return is not a guaranteed rate of return, but rather a theoretical rate of return that is based on the assumptions made in the calculation.

### Get started today with Causal

Start building your own custom financial models, in minutes not days.