Finance

IRR Calculator

Calculate the internal rate of return for any investment. Enter your initial investment and up to 10 yearly cash flows to find the annualized return.

Quick Answer

IRR is the discount rate that makes an investment's NPV equal to zero. It represents the annualized return rate. For example, investing $100,000 and receiving $25K, $30K, $35K, $40K, and $50K over 5 years yields an IRR of approximately 17.1%. Compare IRR to your cost of capital to determine if an investment creates value.

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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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Results

Internal Rate of Return

20.53%

Total Cash In
$180,000
Net Profit
$80,000
Simple ROI
80.0%
Payback Period
3.3 yrs

NPV at Various Discount Rates

Discount RateNPVDecision
0%$80,000Accept
5%$53,339Accept
10%$32,183Accept
15%$15,165Accept
20%$1,305Accept
25%-$10,112Reject
30%-$19,615Reject

Cash Flow Timeline

Yr 0-$100,000
Yr 1$25,000
Yr 2$30,000
Yr 3$35,000
Yr 4$40,000
Yr 5$50,000
Disclaimer: This calculator provides estimates for educational purposes only. IRR assumes reinvestment of cash flows at the calculated rate, which may not be realistic. Real-world investment returns depend on many factors not captured here. Consult a qualified financial advisor before making investment decisions.

About This Tool

The IRR Calculator (Internal Rate of Return) helps investors and business managers evaluate the profitability of potential investments. IRR is one of the most widely used metrics in corporate finance, venture capital, private equity, and real estate investing. By finding the discount rate that makes NPV zero, IRR provides a single percentage that summarizes an investment's attractiveness.

How the Calculation Works

This calculator uses Newton's method to iteratively solve for the rate r in:

0 = -Investment + CF1/(1+r) + CF2/(1+r)2 + ... + CFn/(1+r)n

Starting with an initial guess of 10%, the algorithm refines the estimate by examining the NPV function and its derivative. It converges quickly — typically within 10-20 iterations — to a solution accurate to 0.0001%.

IRR Decision Rule

The fundamental IRR decision rule is simple: accept projects where IRR exceeds the cost of capital (hurdle rate), reject those where it falls short. For example, if your WACC is 12% and the project's IRR is 18%, the project creates value. Use our WACC calculator to determine your cost of capital for comparison.

IRR vs. NPV: Complementary Tools

While IRR gives a percentage return, NPV gives a dollar amount of value created. NPV is generally considered the more reliable metric because it does not assume reinvestment at the IRR rate and can handle projects of different sizes. Our NPV calculator lets you perform this complementary analysis. Best practice is to use both metrics together — if they disagree, NPV should typically be the tiebreaker.

Modified IRR (MIRR)

MIRR addresses IRR's reinvestment assumption by specifying a financing rate for negative cash flows and a reinvestment rate for positive cash flows. While this calculator focuses on traditional IRR, understanding MIRR is valuable for comparing projects with very different cash flow patterns or when the IRR reinvestment assumption is clearly unrealistic.

When IRR Fails

IRR can produce misleading results in several scenarios: (1) Projects with unconventional cash flow patterns (multiple sign changes) may have multiple IRRs or none at all. (2) Mutually exclusive projects of different scales cannot be reliably compared by IRR alone. (3) Very short-duration projects may show astronomically high IRRs that overstate their attractiveness. In these cases, rely more heavily on NPV and profitability index.

Frequently Asked Questions

What is the Internal Rate of Return (IRR)?
IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. In simpler terms, it is the annualized effective compounded return rate that an investment is expected to generate. If the IRR exceeds your required rate of return (hurdle rate), the investment is generally considered attractive.
How is IRR calculated?
IRR is found by solving the equation: 0 = -Initial Investment + CF1/(1+IRR)^1 + CF2/(1+IRR)^2 + ... + CFn/(1+IRR)^n. There is no closed-form solution, so it is calculated iteratively. This calculator uses Newton's method, which converges quickly to the correct rate by repeatedly refining an initial guess based on the NPV function's slope.
What is a good IRR?
A 'good' IRR depends on the investment type and risk level. Venture capital typically targets 25-35%, private equity aims for 15-25%, real estate development targets 15-20%, and corporate projects often use 10-15% as a hurdle rate. Always compare IRR to your cost of capital (WACC) — an investment creates value only if its IRR exceeds the cost of funding it.
What are the limitations of IRR?
IRR has several limitations: (1) It assumes cash flows are reinvested at the IRR itself, which may be unrealistic for high IRRs. (2) Multiple IRRs can exist when cash flows change sign more than once. (3) IRR cannot compare projects of different sizes — a 50% IRR on a $1,000 investment creates less value than a 20% IRR on $1,000,000. (4) It ignores the timing of when returns are received. For these reasons, use IRR alongside NPV for better decision-making.
What is the difference between IRR and ROI?
ROI (Return on Investment) is a simple percentage: (Net Profit / Cost) x 100. It does not account for the time value of money. IRR, by contrast, is an annualized rate that considers when cash flows occur. A project with 100% ROI over 10 years has a very different IRR (about 7.2%) than one with 100% ROI over 2 years (about 41.4%). IRR is generally more useful for comparing investments with different time horizons.
How does IRR relate to NPV?
IRR is the discount rate where NPV equals zero. If you discount cash flows at a rate below the IRR, NPV is positive (the investment adds value). If you discount at a rate above the IRR, NPV is negative. The NPV sensitivity table in this calculator shows this relationship — you can see NPV decrease as the discount rate increases, crossing zero at the IRR.

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