Investment Science: Computing the Internal rate of return of a cash flow stream using a financial calculator

Saturday, August 21, 2010

In this short article, we will see how to use a financial calculator to compute the Internal rate of return (IRR) of a cash flow stream, the financial calculator used for illustrating this example is Texas Instruments BA II Plus.

For more details on computing internal rate of return of a cash flow stream, refer this article.

Consider a cash flow stream (-2, 1, 1, 1) , the internal rate of return of this cash flow stream is given by


Solving the above equation, we get IRR = 23.38%.

To calculate the internal rate of return of the above cash flow stream with a Texas Instruments BA II Plus Financial Calculator, follow the below steps.

1. Reset previous cash flow streams if any (read the -> below as a sequence)

Use the following keys: 2ND -> RESET -> ENTER

2. Set the number of decimal places in the financial calculator

By default, the number of decimal digits displayed is 2 and often you need a better precision for a computation like IRR, therefore, set the number of decimal places to atleast 4, for doing this

Use the following keys: 2ND -> FORMAT -> 4 -> ENTER

3. Compute Internal rate of return: Now we are ready to enter the stream of inputs for the cash flow stream (-2, 1, 1, 1)  for computing the internal rate of return, for this use the following keys

3.1.   CF -> 2 -> - (Minus key) -> ENTER ->

3.2.   (CF1 appears) 1 -> ENTER ->

3.3.   (F01 appears with a default value 1, accept it as it is) ENTER ->

3.4.   (CF2 appears) 1 -> ENTER ->

3.5.   (F02 appears with a default value 1, accept it as it is) ENTER ->

3.6.   (CF3 appears) 1 -> ENTER ->

3.7.   (F03 appears with a default value 1, accept it as it is) ENTER ->

3.8.   (CF4 appears) Now Press IRR -> CPT keys, IRR = 23.3752% will be displayed.

Unique positive value of internal rate of return: When a cash flow stream sign doesn't change from negative to positive or vice-versa, trying to compute the internal rate of return result in error, for more details, refer here.

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