# Calculating IRR Using Python And Numpy

## Overview:

• Like NPV the IRR also helps in making investment decisions.
• NPV formula has several elements that are summed together. The corresponding element for t=0 is called the initial investment or the cash flow when t=0.
• The cash flow at t=0 is denoted with a negative sign since it is an outflow from point of view of the investor.
• The future cash flows correspond to t=1, t=2 and so on till t=N.
• The name 'internal' in IRR refers to the fact that the IRR does not account for external factors like inflation.
• IRR is the discount rate which makes Present Value of t0=Present Value of t1+t2+…+tn. IRR is the discount rate that makes the Present Value of cash inflows equal to the Present Value of cash outflows.
• Equating the Present Value of cash outflows to the Present Value of cash inflows and solving for the discount rate obtain IRR.
• Similarly, the discount rate associated with the Present Value of the future cash flows provides the Required Rate of Return (RRR).
• Companies typically select any investment for which the Internal Rate of Return (IRR) is greater than the Required Rate of Return (RRR).

## Example:

 import numpy as np   initialInvestment   = -100; # Negative, since it results in an outflow of cash cashFlows           = [initialInvestment, 20, 30, 40, 50];   # Calculate the IRR irr = round(np.irr(cashFlows),4);   print("Internal rate of return:%3.4f"%irr);

## Output:

 Internal rate of return:0.1283