IRR Calculator
Calculate the Internal Rate of Return (IRR) of an investment — the annualized return that makes the net present value of all cash flows equal to zero. IRR is the percentage return you actually earn on an investment over its life.
What Is IRR?
The Internal Rate of Return (IRR) is the annualized compound return an investment earns over its life. Mathematically, it is the discount rate at which the Net Present Value (NPV) of all future cash flows equals zero.
IRR is expressed as a percentage — the return your money actually earns. If an investment returns 16.58% IRR, that means it generates an equivalent 16.58% compounded annual return. If your hurdle rate (the minimum return you require) is 10%, the investment is acceptable.
IRR Formula
IRR is the rate r that satisfies:
0 = −C₀ + CF₁/(1+r)¹ + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ
There is no closed-form solution for IRR with more than one cash flow — it must be solved iteratively. This calculator uses the Newton-Raphson method, starting from a guess and iterating until the NPV converges to zero.
Worked Example
Investment of $100,000, cash flows of $25K, $30K, $35K, $40K, $45K over 5 years:
Year 1–5 cash flows = $175,000 total
Net profit = $175,000 − $100,000 = $75,000
IRR ≈ 16.58%
If hurdle rate is 10%, IRR exceeds the hurdle by 6.58% — accept the project.
If hurdle rate is 18%, IRR falls below the hurdle — reject the project.
How to Interpret IRR
- IRR > Hurdle Rate (Accept) — the investment beats the required return. Creates value.
- IRR = Hurdle Rate (Indifferent) — exactly meets the required return. Acceptable but no value creation.
- IRR < Hurdle Rate (Reject) — the investment falls short of the required return. Destroys value.
- Comparing investments — among mutually exclusive options, higher IRR is generally better, but NPV is the more reliable comparison metric when investment sizes differ.
Frequently Asked Questions
What is a good IRR?
It depends on the hurdle rate and the risk of the investment. IRR above the hurdle rate is acceptable. For low-risk projects, 8–10% may be sufficient. For higher-risk projects, 15–25% is expected. Real estate investors typically target 15–20% IRR. Venture capital often targets 25%+ IRR.
What is the difference between IRR and ROI?
ROI is total return over the life of the investment, calculated as (final value − initial cost) ÷ initial cost. IRR is the annualized compound return that accounts for the timing of each cash flow. For a single lump-sum investment with one exit, ROI and IRR tell similar stories; for investments with multiple cash flows, IRR is much more accurate.
What is the difference between IRR and NPV?
NPV gives a dollar amount — how much value the investment creates. IRR gives a percentage — the annualized return. Both use the same cash flows. NPV is generally preferred for decision-making because it directly measures value creation and does not suffer from IRR's problems (multiple IRRs, reinvestment assumption issues). IRR is useful for comparing investments of different sizes.
Why does IRR assume reinvestment at IRR?
IRR's mathematical definition implies that all intermediate cash flows are reinvested at the IRR itself — which is often unrealistic. If IRR is 25%, the model assumes you can reinvest each year's cash flow at 25%. In practice, you may only be able to reinvest at 10%. This is one of the main criticisms of IRR. NPV does not have this problem because it assumes reinvestment at the discount rate, which is more realistic.
Can IRR be negative?
Yes. A negative IRR means the investment loses money over its life — the total cash inflows are less than the initial investment. This is common in failing ventures, but can also happen with projects that have significant early-stage losses before turning profitable.
What is the multiple IRR problem?
When a series of cash flows changes sign more than once (for example, negative, positive, negative, positive), the IRR equation can have multiple solutions — multiple rates that make NPV zero. This makes IRR ambiguous. In such cases, use NPV or the Modified IRR (MIRR) instead. This calculator handles typical investment patterns where there is one sign change (initial investment negative, then all positive).