IRR or Internal Rate of Return
This method is a discounted cash flow technique that uses the principle of NPV. It is described as the rate such equates the present value of cash outflows of an investment to the initial capital.
IRR = P_{v} (cash inflows)
= P_{v}(cash outflows) or
IRR is the cost of capital when as NPV = 0.
It is also identified internal rate of return since it depends completely on the outlay of investment and proceeds associated along with the project and not a rate determined outside the venture.
IRR = C = A_{1} / (1+r)^{1} + A_{2}/(1+r)^{2} + A_{3} / (1+r)^{3} + ... A_{N} / (1+r)^{N}
A = inflow for each period
C = Cost of investment
The value r can be found via:
i) Trial and error
ii) Via interpolation
iii) Via extrapolation