Another way to interpret the IRR is through an investment-balance diagram. Figure 5-4 shows how much of the original investment in an alternative is still to be recovered as a function of time. The downward arrows in Figure 5-4 represent annualreturns,(Rk−Ek)for1≤k≤N,againsttheunrecoveredinvestment,andthe dashed lines indicate the opportunity cost of interest, or profit, on the beginningof-year investment balance. The IRR is the value of i′ in Figure 5-4 that causes the unrecovered investment balance to exactly equal zero at the end of the study period (year N)andthusrepresentstheinternalearningrateofaproject.Itisimportanttonotice that i′% is calculated on the beginning-of-year unrecovered investment through the lifeofaprojectratherthanonthetotalinitialinvestment.