'Internal Rate Of Return - IRR

IRR used in Capital Budgeting measuring the profitability of potential investments. Internal rate of Return is a discount rate that makes the Net Present Value(NPV) of all cash flows from a particular Project equal to zero. IRR calculations depends on the same formula as NPV does.

Formula for calculating NPV: 

where:

C_t = net cash inflow during the period t

C_o= total initial investment costs

r = discount rate, and

t = number of time periods 

To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate r, which is here the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically, and must instead be calculated either through trial-and-error or using software programmed to calculate IRR.