Building an Online IRR Calculator with React

In the last article we covered the concepts of NPV (Net Present Value) and IRR (Internal Return Rate), with math insights and almost no code. Now we are going to get more serious and develop an online tool that will enable us to calculate the IRR for a given investment.

Curious already? Check it out.

Recap

Recall that IRR is the discount rate

rr

that gives us

NPV=0NPV = 0

. In simple words, for a given initial investment and a projected cash flow over time, IRR tells us what the return rate is.

Our goal then is to compare multiple investments and analyze their IRR’s in order to make better financial choices. It applies for a wide range of endeavours — from opening a new restaurant to buying AAPL stocks. The online calculator should be, then, simple to use and quick to test multiple assumptions. Let’s assess our requirements.

Requirements

Here’s a really condensed list of requirements for our app:

  1. It must work online and in multiple devices (responsive);
  2. The user must provide an initial amount, a period of time, and a cash flow;
  3. The user may input the cash flow manually or;
  4. The user may generate the cash flow automatically given a projected base cash flow and a growth rate;
  5. It must be fully accessible through the keyboard;
  6. The app must not accept invalid inputs.

As you can see, nothing fancy. For Requirement #4 we will need some extra math and for #5 we will need to deal with accessibility, DOM and refs.

The App

All the code for this simulator can be found on GitHub.

Here’s a simulation for one of the examples given in Making Better Investments with Math and JavaScript (Elon’s proposal). Compare it with the above requirements.

Requirements #3 and #4 are covered and #6 is gracefully achieved (button remains disabled until all inputs are present).

Let’s start with the code (don’t worry if you can’t figure out what all lines are doing, we will revisit them soon):

import React from 'react';
import css from './index.module.css';
import { IRR } from './util';
import NumericInput from './NumericInput';
import ModeSelector from './ModeSelector';
import Result from './Result';

const MODE = { AUTO: "AUTO", MANUAL: "MANUAL" };

export default class Calculator extends React.Component {

  constructor() {
    super();
    this.state = {
      initialAmount: "",
      projectedCash: "",
      growthRate: "",
      period: "",
      IRR: "",
      manualProjectedFlow: [],
      projectionMethod: MODE.AUTO
    };
    this.investmentInput = React.createRef();
  }

  ...

  render() {
    return (
      <div className={css['container']}>
        <header>
          <h1>IRR Calculator</h1>
        </header>
        <main className={css['main']}>
          <NumericInput 
            autoFocus
            min={0}
            label="Initial Investment"
            hint="Money you need to invest upfront"
            value={this.state.initialAmount}
            onChange={this.onInputChange.bind(this, "initialAmount")}
            ref={this.investmentInput}
          />
          <NumericInput 
            min={1}
            label="Period of Time"
            hint="Total period of investment. Should be between 1 and 30"
            value={this.state.period}
            onChange={this.onPeriodChange.bind(this)}  
          />
          <ModeSelector
            autoValue={MODE.AUTO}
            manualValue={MODE.MANUAL}
            isAutoMode={this.isAutoMode}
            isManualMode={this.isManualMode}
            onChange={e => this.setState({projectionMethod: e.target.value})}
          />
          {this.automaticProjection}
          {this.manualProjection}
          <button 
            disabled={!this.isFormValid} 
            onClick={this.onClick.bind(this)}>Calculate</button>
          {this.IRR}
        </main>
        <footer className={css['footer']}>
          Created by 
          {' '}
          <a href="https://rafaelquintanilha.com">Rafael Quintanilha</a>
        </footer>
      </div>
    );
  }
}

The constructor should be easy to follow. Note that we define our state as a list of empty values, the exception being manualProjectedFlow and projectionMode.

The first is an array which will hold the projected cash flow for a given period

tt

. So, in the above .gif, manualProjectedFlow is an array of length 1 in which manualProjectedFlow[0] === 11000. The latter determines in which mode we are: AUTO or MANUAL (defaults to AUTO).

We’ll talk about this.investmentInput = React.createRef(); in a bit. But first note that apart from the mode selection (MANUAL or AUTO) all inputs are numeric. It made sense then to come up with a <NumericInput /> component that we will describe next:

import React from 'react'
import css from './NumericInput.module.css';
import { uniqueId } from 'lodash';

export default class NumericInput extends React.Component {

  constructor() {
    super();
    this.id = uniqueId("irr-");
    this.input = React.createRef();
  }

  get hint() {
    if ( !this.props.hint ) return null;
    return <div className={css['hint']}>{this.props.hint}</div>;
  }

  focus() {
    this.input.current.focus();
  }

  render() {
    const { label, value, onChange, hint, ...rest } = this.props;
    return (
      <div>
        <label htmlFor={this.id}>{label}</label>
        <br />
        <input
          className={css['input']}
          ref={this.input}
          id={this.id}
          type="number" 
          value={value}
          onChange={onChange}
          {...rest}
        />
        {this.hint}
      </div>
    );
  }
}

Couple things going on here.

First and foremost note that we use destructure assignment in order to flexbilize the accepted props for our input. We only fix some props, notably type, value and onChange.

Notice also that, in order to meet a11y standards, we generate an id by calling lodash’s uniqueId. We then assign this id to both input and label, so screenreaders now can work properly.

Finally notice that we create a ref and assign it to our input. More than that, we create a class method focus() which basically focus on the input. Why is that? Recall one of the NumericInput components of Calculator:

<NumericInput 
  autoFocus
  min={0}
  label="Initial Investment"
  hint="Money you need to invest upfront"
  value={this.state.initialAmount}
  onChange={this.onInputChange.bind(this, "initialAmount")}
  ref={this.investmentInput}
/>

The ref created in the constructor is assigned to this NumericInput, the first input and the one we want to programatically trigger focus. By doing that, when we call this.investmentInput.current, instead of accessing the DOM element (as you may expect from refs documentation), we get a component instance and therefore we can call focus(). This technique is also explained here. Notice that this is somewhat discouraged by the React team, which advocates ref forwarding instead. While I do agree with them, I believe one can make a case for simply adding a ref to the child (for example when the child component needs to be a class component).

Let’s now dive into the projection modes.

Auto Mode

Suppose that you want to calculate the IRR for an investment which is supposed to be 30 years long. You project that it is able to yield $10,000/year and that it can grow 2.5% each year. In this case, the projected base cash inflow is

1000010000

and the growth rate is

0.0250.025

.

In other words, you predict that in the first year the investment will generate

1000010000

in cash. In the following year,

10000(1+0.025)10000 * (1 + 0.025)

. In the end of the third year it will be

10000(1+0.025)210000 * (1 + 0.025)^2

and you get the idea. How do we translate this into code?

First we define a getter which only renders when on AUTO mode:

get automaticProjection() {
  if ( this.isManualMode ) return null;
  return (
    <React.Fragment>
      <NumericInput 
        label="Projected Base Cash Inflow"
        value={this.state.projectedCash}
        onChange={this.onInputChange.bind(this, "projectedCash")}
        hint="How much you expect will be the base cash flow in the future"
      />
      <NumericInput 
        label="Growth Rate (%/period)"
        hint="Total period of investment. Should be between 1 and 30"
        value={this.state.growthRate}
        onChange={this.onInputChange.bind(this, "growthRate")} 
        hint="How much your base cash flow will grow in each period"
      />
    </React.Fragment>
  );
}

Which basically renders markup and assigns the correct value and onChange to each input.

We then can evaluate the projected cash flow:

get projectedCashFlow() {
  return Array(this.state.period).fill(0)    .map((el, i) => this.state.projectedCash * Math.pow((1 + this.state.growthRate / 100), i));
}

The only tricky part here is creating an array of projected cash flow in a functional fashion. Instead of using a for loop (which is fine), I resorted to use Array(this.state.period).fill(0). This basically creates an array of length this.state.period and fill it with zeroes. The value is not particularly important, but .fill is what makes it iterable. This post is very thorough in explaining how to manipulate and create arrays in various ways.

And now we can create a cash flow from three inputs: the period, the base projected cash flow and the growth rate.

Manual Mode

If you want more control over your simulation, you may simply provide values for each period individually. Look at the correspondent getter:

get manualProjection() {
  if ( !this.isValid(this.state.period) || this.isAutoMode ) return null;
  return (
    <React.Fragment>
      {Array(this.state.period).fill(0).map((el, i) => (
        <NumericInput
          key={i}
          label={`Cash Flow for Period ${i+1}`}
          value={this.isValid(this.state.manualProjectedFlow[i]) ? this.state.manualProjectedFlow[i] : ""}
          onChange={this.onManualCashChange.bind(this, i)}
        />
      ))}
    </React.Fragment>
  );
}

Because each period maps to a new entry in the cash flow, we necessarily need this.state.period to be a valid value. We define isValid as:

isValid(value) {
  return value !== "" && !isNaN(value);
}

Again we resort to Array(this.state.period).fill(0) to generate an array of size this.state.period. When a particular cash flow entry change, we need to update this.state.manualProjectedFlow accordingly (remember we initialized it as an empty array). Here’s how we do it:

onManualCashChange(i, e) {
  const clone = this.state.manualProjectedFlow.concat([]);
  clone[i] = parseFloat(e.target.value);
  this.setState({manualProjectedFlow: clone});
}

Because in React we aim for immutability, we first clone the current array before updating it. A simple way to do it is to simply concatenate the original array with an empty one.

Calculating the IRR

The final step is to gather all information together and evaluate the IRR. This is done in the onClick handler of the rendered button, but it will be available only if the form is valid:

get isFormValid() {
  if ( this.isAutoMode ) {
    return this.isValid(this.state.initialAmount)
      && this.isValid(this.state.period)
      && this.isValid(this.state.growthRate)
      && this.isValid(this.state.projectedCash);
  }
  else if ( this.isManualMode ) {
    return this.isValid(this.state.initialAmount)
      && this.isValid(this.state.period)
      && this.state.manualProjectedFlow.length === this.state.period
      && this.state.manualProjectedFlow.reduce((acc, val) => acc && this.isValid(val), true);
  }
}

For the AUTO mode we simply check that all base inputs are valid and for MANUAL mode also check that we have a valid entry for each period. When this.isFormValid === true we can proceed:

onClick() {
  const futureCashflow = this.isAutoMode ? this.projectedCashFlow : this.state.manualProjectedFlow;
  const cashflow = [(-1) * this.state.initialAmount, ...futureCashflow];
  this.setState({IRR: IRR(cashflow)});
}

Notice that futureCashflow is defined as the projected flow for that investment, evaluated differently in AUTO or MANUAL modes. We then append this to the initialAmount, which has its sign inverted (we are assuming nobody is paying you upfront, as unfortunate as this can be).

The complete cashflow array is then fed to the IRR function we came up with in the previous post. For the sake of this tool, though, I used a slightly different version:

export const IRR = (cashflow, initialGuess = 0.1) => {
  const maxTries = 10000;
  const delta = 0.001;
  let guess = initialGuess;
  const multiplier = NPV(cashflow, guess) > 0 ? 1 : -1;
  let i = 0;
  while ( i < maxTries ) {
    const guessedNPV = NPV(cashflow, guess);
    if ( multiplier * guessedNPV > delta ) {
      guess += (multiplier * delta);
      i += 1;
    }
    else break;
  }
  return i === 10000 ? "IRR has diverged" : guess;}

Notice that now we return either guess or a friendly message if we have exceed maxTries. The computed IRR is then passed to the Result component as follow:

get IRR() {
  if ( !this.state.IRR ) return null;
  return <Result IRR={this.state.IRR} onResetClick={this.onResetClick.bind(this)} />;
}

Result in its turn is pretty straightforward:

import React from 'react'

export default class Result extends React.Component {

  format(num) {
    return parseFloat(Math.round(num * 10000) / 100).toFixed(2) + "%";
  }

  render() {
    return (
      <React.Fragment>
        {isNaN(this.props.IRR)
          ? <div>{this.props.IRR}. Please try again.</div>
          : <div>Projected IRR is <strong>{this.format(this.props.IRR)}</strong></div>
        }
        <a href="#" onClick={this.props.onResetClick}>Reset</a>
      </React.Fragment>
    );
  }
}

Notice that when this.props.IRR is not a number (for example, when it has diverged) we display the divergence message. Else, we render a nicely formatted value with 2 decimal points.

Finally, we provide a link for easily resetting all information and to start again. It’s defined on Calculator:

onResetClick(e) {
  e.preventDefault();  this.setState({
    initialAmount: "",
    projectedCash: "",
    growthRate: "",
    period: "",
    IRR: "",
    manualProjectedFlow: []
  });
  this.investmentInput.current.focus();}

The first highlighted line is e.preventDefault, which is a simple tricky to avoid appending # to the end of the URL after clicking on the anchor tag. And finally the second highlighted line calls focus() as defined in NumericInput in order to programatically focus on the first input after reset.

Wrapping Up

This was a quick overview of how to create an online tool that enables users to quickly simulate investments by calculating their IRR. Again, check the full code in GitHub and play with the live demo.

Ideas of how to improve the simulation? PRs are welcome!

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