IRR Formula

Internal Rate of Return (IRR) requires the Net Present Value (NPV) to be zero. That means IRR is the rate of return where NPV is 0.


NPV = ∑ {PCF / (1+R)^T} - I

Where
R = Interest Rate
PCF - Period Cash Flow
I - Initial investment
T = Number of Time Periods

IRR is calculated using the NPV formula by solving for R if the NPV equals zero. Internal rate of return (IRR) measures the estimated percentage return from the project. It uses the initial cost of the project and estimates of the future cash flows to figure out the interest rate. If the IRR is less than the expected rate of return, the investment is not worth considering.