How to Calculate IRR on a Financial Calculator

The Internal Rate of Return (IRR) is a financial metric used to assess the profitability of potential investments. It represents the discount rate at which the net present value (NPV) of all cash flows associated with a project or investment becomes zero. Financial calculators streamline the calculation of this rate, helping individuals and businesses make informed investment decisions.

Preparing Your Data for Calculation

Before utilizing a financial calculator to determine the Internal Rate of Return, it is essential to meticulously organize the investment’s cash flow data. The initial investment, which represents the money paid out at the beginning of a project, is always recorded as a cash outflow. This outflow is entered as a negative value in the calculator, signifying funds leaving the investor. For example, a $10,000 initial investment would be input as -10,000.

Following the initial investment, all subsequent cash movements, both inflows and any further outflows, must be clearly identified and sequenced according to their timing. Cash inflows, such as revenues or cost savings, are entered as positive values, while any additional expenditures during the project’s life are entered as negative values. The consistent application of this sign convention—negative for outflows and positive for inflows—is important for the calculator to accurately process the data and compute the correct IRR. The timing of these cash flows, whether annual, quarterly, or monthly, is also important, as IRR calculations are sensitive to the periods in which money is received or spent.

Using a Financial Calculator to Find IRR

Calculating the Internal Rate of Return involves a sequence of actions: clearing previous data, inputting the initial investment, entering all subsequent cash flows, and then computing the IRR. Always clear the calculator’s memory before starting a new calculation to prevent errors.

TI BA II Plus

For the TI BA II Plus financial calculator, the process begins by pressing the CF button to access the Cash Flow worksheet. Within this worksheet, clear any existing data by pressing 2nd followed by CLR WORK. Next, input the initial investment by typing the amount, then pressing the +/- key to make it negative, followed by ENTER and the down arrow ↓. For an initial investment of -$10,000, you would input 10000, +/-, ENTER, ↓.

To enter the subsequent cash inflows, continue using the down arrow ↓ to navigate to C01, C02, and so forth. For each period, type the cash flow amount, press ENTER, and then the down arrow ↓. For example, if the cash flows are $3,000, $4,000, and $5,000 for years one, two, and three respectively, you would enter 3000, ENTER, ↓ for C01; then 4000, ENTER, ↓ for C02; and 5000, ENTER, ↓ for C03. Once all cash flows are entered, press the IRR button, then CPT (Compute) to display the Internal Rate of Return.

HP 12c

For those using the HP 12c financial calculator, begin by clearing previous financial data by pressing f then CLEAR FIN. To input the initial investment, type the amount, then press CHS (Change Sign) to make it negative, and store it as the initial cash flow by pressing g followed by CF0.

To enter the subsequent cash flows, type each cash flow amount and press g followed by CFj. For example, for the cash flows of $3,000, $4,000, and $5,000, you would input 3000, g, CFj; then 4000, g, CFj; and 5000, g, CFj. After all cash flows are entered, simply press f followed by IRR to calculate and display the Internal Rate of Return. Common errors during these calculations often stem from not clearing the calculator’s memory or applying an inconsistent sign convention for cash inflows and outflows.

Understanding Your IRR Result

After calculating the Internal Rate of Return, the resulting percentage provides a benchmark for evaluating the investment’s potential profitability. The IRR is typically compared against a “hurdle rate,” which is the minimum acceptable rate of return for a project. This hurdle rate often reflects a company’s cost of capital or a predetermined required return that accounts for the project’s risk.

If the calculated IRR is greater than the established hurdle rate, the investment is generally considered financially viable and may be accepted. Conversely, if the IRR falls below the hurdle rate, the project might not generate sufficient returns and would likely be rejected. The IRR represents the effective annual yield the investment is expected to generate over its lifespan, making it a tool for comparing different investment opportunities.