A statistic used in financial analysis to calculate the profitability of possible investments is the internal rate of return (IRR). IRR is a discount rate that, in a discounted cash flow analysis, sets the net present value (NPV) of all cash flows to zero.
Calculations of IRR use the same formula as NPV calculations.
NPV is equal to -$58,050 plus $15,480[(1/I) - (1/(I (1 + I)N)]
= -$40,000 + $9,000[(1/0.11) - (1/(0.11 × (1 + 0.11)7)]
= $2,409.77.
Answer from a financial calculator: Provide the values CF0 = -58,050, CF1-7 = 15,480, and I/YR = 7, and then calculate the NPV as $2,409.77.
Internal rate of return (IRR) = -17.21% can be calculated using a financial calculator by entering CF0 = -58,050 and CF1-8 = 15,480.
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