Internal Rate of Return, or IRR, represents the discount rate that makes the Net Present Value (NPV) of all cash flows from a particular project equal to zero. In simpler terms, it is an estimate of the profitability of potential investments.NPV: Net Present ValueCt: Cash Inflows During a PeriodC0: Initial Investmentt: Time Periodr: IRRThe IRR for this investment can't be calculated through an algebraic formula, but requires an iterative process, as it is the value of 'r' from the above formula.Typically, we can use the built-in functions from Excel to calculate the IRR. If the investment generates a constant cash flow every period, we typically use the RATE function to calculate the return on an investment. NPER refers to the total number of payment periods in an investment, such as the number of months or years. PMT stands for the payment made each period and cannot change over the life of the investment. PV is the present value or the total amount that a series of future payments is worth now. FV is the future value or a cash balance you wish to attain after the last payment has been made.
Learn Internal Rate of Return - Annuity Cash Flow with interactive examples and practice exercises in our Mergers and Acquisitions module.
This interactive learning module helps you understand Internal Rate of Return - Annuity Cash Flow through hands-on practice and real-world examples.