IRR Calculator

Q: What is IRR (Internal Rate of Return)?

IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from an investment equal to zero. In simpler terms, it is the expected annual rate of return on an investment. A higher IRR indicates a more profitable investment. IRR is widely used to evaluate the attractiveness of projects or investments.

Q: What is a good IRR for an investment?

A "good" IRR depends on your cost of capital and industry. Generally, an IRR above 15-20% is considered strong for most businesses. Venture capital expects 25-30%+, real estate typically targets 15-20%, and corporate projects often require 12-15% minimum. Always compare IRR to your WACC (Weighted Average Cost of Capital) - IRR should exceed WACC for a project to add value.

Q: How is IRR different from ROI?

ROI (Return on Investment) is a simple percentage: (Gain - Cost) / Cost × 100. It ignores the time value of money and timing of cash flows. IRR accounts for when cash flows occur and the time value of money, making it more accurate for multi-year investments. A project with 50% ROI over 10 years may have a lower IRR than one with 30% ROI over 2 years.

Q: What is the difference between IRR and NPV?

NPV (Net Present Value) calculates the dollar value of future cash flows discounted at a specific rate, showing absolute profit. IRR finds the rate that makes NPV zero, showing the percentage return. NPV is better for comparing projects of different sizes (tells you how much money you will make), while IRR is better for comparing percentage returns (tells you the rate of return). Use both together for comprehensive analysis.

Q: Can IRR be negative or have multiple values?

Yes, IRR can be negative if an investment loses money (cash outflows exceed inflows). IRR can also have multiple solutions when cash flows change from negative to positive more than once (non-conventional cash flows). In such cases, consider using MIRR (Modified IRR) which assumes reinvestment at a more realistic rate and always gives a single, meaningful result.

Calculate Internal Rate of Return (IRR) for your investment projects. Analyze profitability, NPV, MIRR, and payback period to make data-driven investment decisions and evaluate project viability.

Calculate IRR

Enter initial investment and cash flows

Investment Analysis

19.71%

IRR

15.76%

MIRR

✅ ACCEPT - IRR (19.71%) > Required Rate (10%)

Financial Metrics

NPV @ 10%:$29,079

Payback Period:3.25 years

Simple ROI:175.00%

Cash Flow Summary

Initial Investment:-$100,000

Total Cash Inflows:$175,000

Net Cash Flow:$75,000

💡 Interpretation: This investment generates an annual return of 19.71%. This exceeds your required rate of 10%, creating value. You'll recover your investment in 3.3 years.

Common IRR Benchmarks by Industry

Private Equity & Venture Capital

Venture Capital25-30%+

High-risk, high-return early-stage investing

• Seed/Series A: 30-50% target
• Growth stage: 20-30%

Private Equity20-25%

Leveraged buyouts and growth capital

• Established companies
• 3-7 year hold periods

Real Estate & Corporate

Real Estate Development15-20%

Property development projects

• Commercial: 15-18%
• Residential: 12-16%

Corporate Projects12-15%

Internal capital projects

• Must exceed WACC
• Varies by industry risk

Infrastructure8-12%

Lower risk, stable returns

• Utilities, toll roads
• Long-term predictable cash flows

How to Calculate IRR

IRR Calculation Method

IRR Definition: The discount rate (r) that makes NPV = 0
NPV = Σ [CFt / (1+r)^t] = 0

Newton-Raphson Method: Iterative algorithm to find r
Start with initial guess (e.g., 10%), refine until NPV ≈ 0

Inputs Required:
• Initial Investment (negative, usually at t=0)
• Series of future cash flows (positive or negative)
• Each cash flow occurs at the end of a period

Interpretation:
If IRR > Required Rate of Return → Accept Project
If IRR < Required Rate of Return → Reject Project

Step-by-Step Calculation:

1
List all cash flows
Initial investment (negative) + future cash inflows/outflows
2
Set up NPV equation
NPV = CF0 + CF1/(1+r) + CF2/(1+r)² + ... = 0
3
Solve for r (IRR)
Use iterative method or financial calculator
4
Compare to hurdle rate
Decision: Accept if IRR exceeds required return

📚 Authority Reference:

Academic Standards:

CFA Institute: CFA Program Level I - Corporate Finance & Capital Budgeting sections cover IRR calculation methods and applications
MIT OpenCourseWare: Course 15.401 (Finance Theory I) - Capital Budgeting lecture materials

Standard Textbooks:

Brealey, Richard A., Stewart C. Myers, and Franklin Allen. Principles of Corporate Finance (13th ed.). McGraw-Hill Education, 2020. Chapter 5: Net Present Value and Other Investment Criteria.
Brigham, Eugene F., and Michael C. Ehrhardt. Financial Management: Theory & Practice (16th ed.). Cengage Learning, 2020. Chapter 10: The Basics of Capital Budgeting.
Ross, Stephen A., Randolph W. Westerfield, and Jeffrey Jaffe. Corporate Finance (12th ed.). McGraw-Hill Education, 2019. Chapter 6: Making Capital Investment Decisions.

Calculation Method: Newton-Raphson iterative algorithm for finding IRR (the rate where NPV=0). This method has been the industry standard since the 1970s and is used in:

Microsoft Excel: IRR() and XIRR() functions
Financial calculators: HP 12C, TI BA II Plus
Bloomberg Terminal and Reuters Eikon

Note: IRR formula (NPV = Σ [CFt / (1+r)^t] = 0) is universally accepted in finance literature. This calculator implements the exact formulas from the textbooks above.

Important Considerations

⚠️ IRR Limitations

IRR assumes reinvestment at the IRR rate (often unrealistic) and can have multiple solutions for non-conventional cash flows. For mutually exclusive projects, NPV is often a better decision criterion than IRR. Consider using MIRR for more realistic reinvestment assumptions.

🔄 Reinvestment Assumption

IRR assumes reinvestment at IRR rate

• Often unrealistic for high IRRs
• MIRR uses more realistic rate
• Consider actual reinvestment opportunities

📏 Project Scale

IRR ignores absolute size of investment

• $1M at 30% vs $10M at 20%
• Higher IRR ≠ more dollars
• Use NPV for scale comparison

⏱️ Multiple IRRs

Can occur with non-conventional cash flows

• Sign changes more than once
• May have 0, 1, or multiple solutions
• Use MIRR or NPV profile instead

🎯 Mutually Exclusive Projects

IRR can give wrong ranking

• Different scales or timing
• NPV often better criterion
• Consider incremental IRR

Example Cases

Case 1: Software Development Project

Initial Investment: -$100,000
Year 1 Cash Flow: $25,000
Year 2 Cash Flow: $30,000
Year 3 Cash Flow: $35,000
Year 4 Cash Flow: $40,000
Year 5 Cash Flow: $45,000

IRR: 22.90%
NPV @ 10%: $33,574
MIRR @ 10%: 18.72%
Payback Period: 3.33 years
Total Return: $175,000
Simple ROI: 75%

Analysis: Strong project with 22.9% IRR exceeding typical 12-15% hurdle rate for corporate projects. Positive NPV of $33.6K confirms value creation. Payback in 3.3 years provides reasonable liquidity. MIRR at 18.7% shows more conservative return with realistic reinvestment.

Case 2: Real Estate Investment

Initial Investment: -$500,000
Year 1-4: $40,000/year
Year 5 (with sale): $640,000

IRR: 18.45%
NPV @ 10%: $172,776
MIRR @ 10%: 15.23%
Payback Period: Not recovered until sale
Total Return: $800,000
Simple ROI: 60%

Analysis: Excellent real estate deal with 18.45% IRR above typical 15-20% target. Large positive NPV indicates significant value. Most return comes from final sale (lump sum exit). MIRR at 15.23% still attractive with conservative reinvestment assumption.

Case 3: Equipment Replacement

Initial Investment: -$50,000
Year 1-5: $15,000/year savings

IRR: 15.24%
NPV @ 10%: $6,862
MIRR @ 10%: 13.15%
Payback Period: 3.33 years
Total Return: $75,000
Simple ROI: 50%

Analysis: Marginal project with 15.24% IRR slightly above typical corporate hurdle rate. Small positive NPV suggests proceed if no better alternatives. Even cash flows provide predictable returns. MIRR at 13.15% shows acceptable return with realistic assumptions. Quick payback reduces risk.

IRR vs Other Investment Metrics

Metric	What It Measures	Advantages	Disadvantages
IRR	Percentage return (discount rate where NPV = 0)	• Easy to understand • Considers time value • No discount rate needed	• Unrealistic reinvestment assumption • Multiple solutions possible • Ignores project scale
NPV	Dollar value added at specific discount rate	• Shows absolute profit • Best for mutually exclusive projects • Additive property	• Requires discount rate • Not intuitive percentage • Harder to compare across scales
MIRR	Modified IRR with realistic reinvestment rate	• More realistic • Single solution always • Better than IRR for ranking	• Requires reinvestment rate assumption • Less widely known • More complex
ROI	Simple percentage return (Gain/Cost)	• Very simple • Quick calculation • Widely understood	• Ignores time value • No timing consideration • Can be misleading
Payback	Time to recover initial investment	• Measures liquidity • Simple concept • Risk indicator	• Ignores cash flows after payback • No time value (unless discounted) • Not a profitability measure

💡 Best Practice: Use multiple metrics together for comprehensive analysis. IRR shows rate of return, NPV shows dollar value, MIRR provides realistic return, and Payback indicates risk. For final decisions on mutually exclusive projects, prefer NPV over IRR.

Frequently Asked Questions

What is IRR (Internal Rate of Return)?