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Internal Rate of Return (IRR) is the percentage of discounted interest at which the net present value of the total returns from the investment becomes zero. It indicates the efficiency, quality, or yield of an investment.and finds widespread use to compare profitability of investments and rank different investments based on attractiveness for the investor.
Manual calculation of IRR is possible, but tedious and time consuming, especially for extended periods.
MS-Excel has an inbuilt formula to calculate IRR. Simply enter the cash flow in rows, with each row representing the net cash flow of the specific period. Use the formula =IRR (range), such as =irr(b1:b10) at the last row to calculate the IRR. The listing of net cash flow in rows has to be in chronological order.
The other option to calculate IRR is through online calculators.
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The online calculator at EngineeringToolbox.com is a simple Ajax-enabled form embedded within the webpage that allows user to input a maximum of 20 net cash flow values. Clicking on the “Calculate" button delivers instant results. The same page also describes the mathematical process to calculate IRR manually.
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DataDynamica has a Internal Rate of Return Online Calculator similar to the one found in EngineeringToolbox, with the only difference being that only seven cash flow values are possible. This website explains the procedure of the calculation alongside the results.
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The Internal Rate of Return Online Calculator at Dee Reavis’s Business–Analysis-Made-Easy.com also uses the same simple Ajax interface as EngineeringToolbox.com, but allows for entering two cash flow values for an accounting year. Both of these cash flow streams, however, remain independent and calculate separately. This calculator offers the additional facility to make a printout.
One limitation of this website is straitjacketing the cash flow periods into years. The user can input the year and the rest of the years automatically increment by one. The only way to get out of this is through an input of the value 1 in the year cell, when the rest of the years become serial numbers.
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Butler Consultants offers an Internal Rate of Return Online Calculator similar to those above. This website actually offers three identical IRR calculators side by side, with each calculator showing worked out Internal Rate of Return examples that can easily be overwritten. The major drawback is straitjacketing the periods into years with no option to change.
The website allows purchasing this calculator for $6 and downloading the same to MS-Excel.
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The Internal Rate of Return Online Calculator at irrq.com is the most comprehensive and the best among the lot.
Calculation is is a four-step approach.
The first page asks the user to enter a header, which may be the name of the investment, the number of payments, and the stating month. This calculator allows up to 40 payments.
The second page allows for input of values, allowing the user to enter a date for each value, a description of payment, and the actual payment, for each value. The calculator has default values for purpose and the value, but the user can easily overwrite these values.
One advantage of this calculator is the facility to sort the data date-wise, meaning entry of data need not be in chronological order. In addition, unlike other online calculators, the user can input the exact date and give a supporting description for the value entered. A break in data or leaving one field blank and entering the date in the wrong format can, however, cause errors in calculations.
The initial sheet has 13 rows, and strangely, addition of a further five rows is possible only after the computation, and then requires re-computation.
The third page is computation of the result, and the fourth page allows saving the result for future use. Saving requires registering with the site and logging in.
Registering with the site and login in allows saving of the calculation. While the calculator is in English, registration is in German! Registration is simple and straightforward, requiring just the name, email, and password, but unless you know elementary German requires some guesswork!
While this online calculator is free, the website also offers a spreadsheet calculator compatible with MS Excel and OpenOffice for $12.
Images: Screenshots of identified sites taken by writer. Screenshot of irrq online calculator is of page 2