Internal Rate of Return (IRR) Guide: Capital Budgeting & NPV Formulas
Master the Internal Rate of Return (IRR): understanding polynomial discounting, hurdle rates, comparing IRR to NPV, and evaluating multi-year capital projects.
The Internal Rate of Return (IRR) is the annualized effective compounded return rate that sets the Net Present Value (NPV) of all project cash flows (both positive and negative) equal to exactly zero. In corporate capital budgeting, if an investment’s calculated IRR exceeds the firm’s minimum required hurdle rate (or WACC), the project creates economic value and should be approved.
Calculate Project IRR & Net Present Value
Input initial capital investment and multi-year cash inflows to solve exact Internal Rate of Return and profitability index.
1. The Fundamental IRR Equation The Internal Rate of Return is the discount rate $r$ that solves: $$0 = -\text{Initial Outlay} + \sum_{t=1}^{n} \frac{\text{Cash Flow}_t}{(1 + r)^t}$$
When IRR exceeds the project hurdle rate, the investment expands shareholder equity.
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