IRR: What is the incremental IRR

What is the incremental IRR of these two series?

A:-10, 0, 20

B: -11, -2, 25

Answer:

The incremental IRR is the internal rate of return of the difference between two cash flows not the difference in the two internal rates of return.

I like to visualize it like this:

Asset A B B-A
Period 0 -10 -11 -1
Period 1 0 -2 -2
Period 2 20 25 5

The last column is the difference between the two cash flows.

On a TI83 you use the following syntax: irr(initial cost or benefit,{cash flow p1, cash flow p2}) to calculate the IRR of the new column.

You can also use the Solver under MATH, and put in the following:
-1-2/(1+X)^1+5/(1=X)^2 and you should get the same answer. Note that you are finding the X that makes the polynomial zero. In some cases, but not this one, there may be more than one root.

The IRR for B-A is the incremental IRR, which is 44.95

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License