A New Algorithm for Internal Rate of Return

Abstract

The objective of the paper is to present a transparent and easy to use method of computing Internal rate of return (IRR). The methodology is based on a thought experiment involving three datapoints, one which represents a test IRR that is greater than the solution, one with a test IRR that is less than the solution and one that is the actual IRR. The finding is that IRR can be calculated in a transparent manner without resort to trial and error, complex mathematics, financial calculators or preprogrammed spreadsheet functions. Trial and error is time consuming and intellectually unsatisfying. Complex mathematics is beyond the capability of most practitioners and can result in multiple values for IRR. Financial calculators and preprogrammed spreadsheet functions present answers with no means of verification. That seems careless for multimillion dollar projects. The recommendation is to use the algorithm discussed in this paper which is relatively simple and which can be implemented through use of spreadsheets with no loss of transparency.