About the IRR Calculator
Internal rate of return is the discount rate at which a project's net present value equals zero — effectively the annualised return implied by a series of cash flows. It is the standard measure for evaluating investments with money moving in and out over time.
The formula
0 = Σ CFₜ / (1 + IRR)ᵗCFₜ is the cash flow in period t, with the initial investment negative. IRR is the rate that makes the discounted sum zero, found by iteration since there is no closed form.
How to use this calculator
- 1Enter your Initial Investment ($). The field starts at
-50000, which you can overwrite. - 2Enter your Year 1 Cash Flow ($). The field starts at
15000, which you can overwrite. - 3Enter your Year 2 Cash Flow ($). The field starts at
18000, which you can overwrite. - 4Enter your Year 3 Cash Flow ($). The field starts at
20000, which you can overwrite. - 5Enter your Year 4 Cash Flow ($). The field starts at
22000, which you can overwrite. - 6Read the result straight away — it recalculates as you type, so there is no button to press. Use Share to copy a link that reopens the page with your exact numbers filled in.
Worked example
| Input | Value |
|---|---|
| Initial Investment ($) | -50000 |
| Year 1 Cash Flow ($) | 15000 |
| Year 2 Cash Flow ($) | 18000 |
| Year 3 Cash Flow ($) | 20000 |
| Year 4 Cash Flow ($) | 22000 |
Result
IRR: 17.19%
Total Invested: $50,000
Total Cash Flows: $75,000
Net Profit: $25,000
Those are the values the page loads with, so you can reproduce this result yourself and then change one field at a time to see what drives the outcome.
Understanding your result
A project is generally worth doing if its IRR exceeds your cost of capital or hurdle rate. Because IRR accounts for both the size and the timing of every cash flow, it handles uneven streams that simple ROI cannot — a project returning most of its cash early has a higher IRR than one returning the same total later.
IRR has real limitations that matter in practice. It implicitly assumes interim cash flows are reinvested at the IRR itself, which is often unrealistic. It can also produce multiple valid answers when cash flows change sign more than once, and it favours small quick projects over larger ones that create more total value. NPV is the more reliable measure when the two disagree.
Things worth knowing
- Accept a project when IRR exceeds your cost of capital, but check NPV when comparing alternatives.
- Modified IRR uses an explicit reinvestment rate and avoids the unrealistic assumption in standard IRR.
- Cash flows changing sign more than once can produce multiple IRRs, none of them meaningful alone.
- IRR ignores project scale. A 40 percent return on 10,000 creates less value than 20 percent on a million.
- Real estate and private equity quote IRR heavily. Check whether it is gross or net of fees.
Frequently asked questions
What is IRR?+
The discount rate at which a project's net present value is zero — effectively the annualised return implied by its cash flows. A project is generally attractive when IRR exceeds your cost of capital.
What is the difference between IRR and NPV?+
IRR gives a percentage return, NPV a dollar value at a specified discount rate. NPV is more reliable for comparing projects because it accounts for scale, which IRR ignores.
What is a good IRR?+
It must exceed your cost of capital to add value. Private equity often targets 20 percent or more, real estate 12 to 20, and corporate projects perhaps 10 to 15 — always relative to the risk involved.
Why does IRR sometimes give multiple answers?+
When cash flows change sign more than once, the polynomial has multiple roots. In that case no single IRR is meaningful, and NPV or modified IRR should be used instead.