IRR Calculator

The IRR calculator helps you evaluate investment profitability by calculating the internal rate of return based on projected cash flows.

โšก Tip: Positive IRR higher than discount rate indicates a profitable investment.
๐Ÿ’ก How to use this IRR Calculator:
  1. Initial Investment: Enter upfront cost (usually negative, e.g., -50000)
  2. Cash Flows: Enter future returns separated by commas (e.g., 15000,20000,25000)
  3. Interpretation: Compare IRR with your required return rate
  4. Decision Rule: IRR > Required Rate = Accept investment

Example: $50,000 investment with $15K, $20K, $25K returns = 17.2% IRR

IRR Formula & Example

What Is Internal Rate of Return (IRR)?

Internal Rate of Return (IRR) is the annualized percentage rate that measures how profitable an investment is over time. It represents the discount rate at which the Net Present Value (NPV) of all future cash flows equals zero.

In simple terms: IRR tells you the average yearly return your investment generates. It accounts for the time value of money, making it more reliable than simple return metrics for multi-year investments.

Why IRR Matters in Investment Decisions

IRR is widely used in capital budgeting, project evaluation, real estate analysis, private equity, and corporate finance.

Decision Rule:

  • If IRR > required rate of return โ†’ Accept the investment
  • If IRR < required rate of return โ†’ Reject the investment
This helps compare multiple investment options with different cash flow patterns.

IRR Formula Explained

Mathematically, IRR is the value of r that satisfies:

NPV = 0
NPV = ฮฃ [ CFt รท (1 + r)t ] โˆ’ Initial Investment = 0

Where:

  • CFt = Cash flow at time t
  • r = Internal Rate of Return
  • t = Time period (year)
  • Initial Investment = Upfront cost (usually negative)

Since this equation cannot be solved directly, IRR is calculated using iterative numerical methods, which this calculator does instantly.

Step-by-Step IRR Example

Assume the following investment:

  • Initial Investment: $50,000
  • Year 1 Cash Flow: $15,000
  • Year 2 Cash Flow: $20,000
  • Year 3 Cash Flow: $25,000

Using the IRR formula, the discount rate that makes NPV = 0 is: IRR โ‰ˆ 17.2%

Interpretation: If your required return is 10%, this investment is attractive because 17.2% > 10%.

What Is a โ€œGoodโ€ IRR?

IRR benchmarks vary by risk and industry:

  • < 8% โ†’ Low return
  • 8% โ€“ 12% โ†’ Moderate return
  • 15% โ€“ 20% โ†’ Strong investment
  • 20%+ โ†’ High-risk / high-reward

Always compare IRR against cost of capital, inflation, and investment risk.

Limitations of IRR

While IRR is powerful, it has some limitations:

  • Multiple IRRs: If cash flows change direction multiple times, more than one IRR may exist.
  • Reinvestment Assumption: IRR assumes cash flows are reinvested at the same IRR, which may not be realistic.
  • Scale Ignorance: IRR ignores investment size โ€” a smaller project can have a higher IRR but lower total profit.

In such cases, consider using NPV or MIRR.

IRR vs Other Investment Metrics

Metric What It Measures Best Use Case
IRR Annualized return Comparing projects
NPV Total value added Maximizing wealth
ROI Simple return Quick evaluation
Payback Period Time to recover cost Liquidity focus

Frequently Asked Questions

What is a good IRR percentage?

IRR higher than your company's cost of capital or required rate of return is good. Typically, IRRs above 15-20% are considered excellent for most investments.

What's the difference between IRR and ROI?

ROI measures total return percentage, while IRR calculates the annualized rate of return considering the time value of money. IRR is more accurate for multi-period investments.

Can IRR be negative?

Yes, negative IRR means the investment loses money over time. It indicates that cash outflows exceed inflows when considering the time value of money.

What if multiple IRRs exist?

Multiple IRRs can occur when cash flows change direction more than once. In such cases, consider using Modified Internal Rate of Return (MIRR) instead.