Financial analysts often use internal rate of return to make capital budgeting and investment decisions. The internal rate of return is the rate at which the cost of investment equals the present value of future cash flows. To calculate the internal rate of return, you need to know the initial cash outlay on an investment or project and the future cash flows it is expected to generate. Mathematically, this is a difficult computation, but the Texas Instruments TI-83 calculator has a function to perform the calculation.
The formula for IRR in the TI-83 calculator is:
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IRR( Initial Outlay, {Cash Flows}, {Cash Flow Counts})
The initial outlay is the price today to purchase the asset. The cash flows are the dollars generated each period by the asset. The cash flow counts variable allows you to specify the number of periods, such as payment periods, that you receive each cash flow. If this variable is not specified, it defaults to a single period for each cash flow listed.
Example
Assume that you have an investment that costs $400 today and generates cash flows over the next four years equal to $100, $200, $200 and $300. Find the internal rate of return for this investment.
Step 1
Press 2nd and Finance to access the finance menu on the calculator. The IRR formula is option 8 in this menu.
Step 2
Enter the information about all cash flows into the formula. Enter -400 for the initial outlay. Enter 100, 200, 300 for the cash flows. Enter 1, 2, 1 for the cash flow frequency.
Note: You also could enter the cash flows as 100, 200, 200, 300 and not enter anything for cash flow counts since that variable will default to 1 for each cash flow.
Step 3
Press ENTER to calculate IRR = 28.90.