Internal rate of return is the discount rate that equals zero when the net present value of an investments cash flow is calculated. There are many useful tools to calculate IRR, such as online precision financial programs and even Excel spreadsheets. An online program will ask you to enter input cash flows; cash outflows which must be negative (the investments) and the cash inflow positive (the results). The programs are usually calculating the IRR and NVP in real time, and are often free. As IRR is a vital tool to analyze investment proposals, you will be given useful information from which to know how to make best use of capital. The conclusion is not as simple as "a high IRR is good, a low IRR is bad". One must consider opportunity costs, alternative investments and risk based analysis.

Some programs allow you to calculate scenario analysis and study some real situations to get to grips with effective implementation. Professional IRR calculation programs are also helpful to give you an understanding of financial concepts and calculation strategy. The best IRR calculation programs use advanced methods to derive IRR, because it is a polynomial and can’t be solved analytically. All these programs use the same formula:

V = -T(1+i)^n-[p(1+i)((1+i)^n - 1)/i]

Where V is the future value of an investment, T is the present value of investment, p is the payment for each period of time, n is the number of periods of time, I is the rate per period. As T and p represent the value of an investment, they must be negative. The same formula can be used to calculate loan repayments.

To calculate NVP, the formula is:

N NPV(C, t, d) = Sum C[i]/(1+d)^t[i] i=0

Where C is the cash flow from 0, the first, to N, the last; d is the discount rate and t is the time between 0 and N. IRR definition leads to the equation NVP(C,t,IRR)=0.

This equation can be solved using basic iteration methods.

Excel offer an internal function named IRR, widely accepted and used with great results. But there are also most complex situations, such as the cash flow changing from positive to negative and back again. These changes generate unexpected problems, producing another IRR for each situation. Excel offers the best solutions to solve these problems: the modified internal rate of return (MIRR). This function has three parameters: the values, the finance rate and the reinvestment rate. The value is the same as the value for the function IRR

Every function must be used in a logical way; there are no magic solutions or functions to solve any problems. You can find some more sophisticated programs that provide accurate results for IRR, NVP and MIRR. Each year the results will be more accurate if you use these programs. IRR is calculated for each year over long periods and is based on the company’s growth rate assumption when accounting for appreciation, income and expenses cumulatively.