IRR Calculator
Calculate Internal Rate of Return (IRR) for investment projects with multiple cash flows
Investment Details
Enter as positive number (will be treated as negative)
Investment Analysis
IRR Interpretation
• IRR > 15%: Excellent investment
• IRR 10-15%: Good investment
• IRR 5-10%: Moderate investment
• IRR < 5%: Consider alternatives
Understanding Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. It represents the annualized rate of return on an investment and is one of the most widely used metrics in capital budgeting and investment analysis.
The IRR Formula
0 = CF₀ + CF₁/(1+IRR)¹ + CF₂/(1+IRR)² + ... + CFₙ/(1+IRR)ⁿ
Where CF = Cash Flow, and IRR is the rate that makes this equation equal zero
IRR cannot be solved algebraically for most cases—it requires iterative calculation (trial and error) or numerical methods like Newton-Raphson. This calculator uses binary search to find the IRR efficiently.
IRR Decision Rule
Accept if: IRR > Hurdle Rate (Required Return)
Reject if: IRR < Hurdle Rate
Your hurdle rate is typically your cost of capital (WACC) or the return you could earn on alternative investments. If a project's IRR exceeds this rate, it creates value for shareholders.
IRR Benchmarks by Investment Type
Real Estate Investments
- • Core properties: 6-9%
- • Value-add: 12-18%
- • Opportunistic: 18-25%+
- • Development: 20-30%+
Private Equity/VC
- • Buyout funds: 15-25%
- • Growth equity: 20-30%
- • Venture capital: 25-35%+
- • Angel investing: 30-50%+
Corporate Projects
- • Equipment replacement: 10-15%
- • Expansion projects: 15-20%
- • New product launch: 20-30%
- • R&D investments: 25%+
Small Business
- • Franchise: 15-25%
- • Restaurant: 20-30%
- • E-commerce: 25-40%
- • Service business: 30-50%
IRR vs NPV: When to Use Each
| Scenario | Use IRR | Use NPV |
|---|---|---|
| Comparing similar-sized projects | ✓ Good | ✓ Good |
| Different project sizes | ✗ Misleading | ✓ Better |
| Mutually exclusive projects | ⚠ Caution | ✓ Preferred |
| Communicating to stakeholders | ✓ Intuitive | ⚠ Less intuitive |
Step-by-Step IRR Example
Example: Equipment Purchase
Initial Investment: $100,000
Cash Flows: Year 1: $30,000 | Year 2: $35,000 | Year 3: $40,000 | Year 4: $45,000
Total Cash In: $150,000
Net Profit: $50,000
IRR = 17.8%
If your cost of capital is 10%, this project creates value (IRR 17.8% > 10% hurdle rate). The NPV at 10% would be approximately $19,000.
Limitations of IRR
Reinvestment Assumption
IRR assumes cash flows are reinvested at the IRR rate, which may be unrealistic for high IRRs.
Multiple IRRs
Projects with alternating positive/negative cash flows can have multiple IRRs, making interpretation difficult.
Scale Ignored
A $10,000 project with 50% IRR creates less value than a $1M project with 20% IRR.
Timing Differences
Comparing projects with different durations can be misleading without adjusting for time.
Modified IRR (MIRR)
MIRR addresses the reinvestment assumption by using a more realistic reinvestment rate (typically cost of capital). It provides a more conservative and often more accurate measure of project profitability. MIRR is calculated as:
Best Practice: Use Multiple Metrics
Don't rely on IRR alone. Use it alongside NPV, payback period, profitability index, and MIRR for comprehensive investment analysis. Each metric provides different insights into project viability.
About This Calculator
Calculate Internal Rate of Return (IRR) for investment projects with uneven cash flows. Compare IRR against WACC and hurdle rates to evaluate capital budgeting decisions and project profitability.
Frequently Asked Questions
What is IRR and how does it differ from ROI?
Internal Rate of Return (IRR) is the discount rate that makes a project NPV equal to zero — the annualized return accounting for cash flow timing. ROI is simpler: total gain / total investment. IRR is superior for comparing projects with different timelines and cash flow patterns. A project returning $150K on $100K investment over 5 years has 100% ROI but only ~8.4% IRR. IRR tells you the annual compounded rate of return.
What is a good IRR for business investments?
Target IRR depends on risk and alternatives. Low-risk projects: 8-12% (above cost of capital). Medium-risk: 15-25%. Venture/startup investments: 25-50%+. Real estate: 12-20%. Compare IRR against your WACC — projects with IRR above WACC create value; below WACC destroy value. Private equity targets 20-30% net IRR. Most corporate capital budgeting uses 10-15% as a minimum hurdle rate.
What are the limitations of IRR?
IRR has known issues: (1) Multiple IRRs can exist when cash flows switch signs more than once. (2) IRR assumes reinvestment at the IRR rate, which may be unrealistic for high-IRR projects. (3) IRR ignores project scale — a $1M project at 20% IRR creates more value than a $10K project at 50% IRR. (4) Cannot compare mutually exclusive projects of different sizes. Use Modified IRR (MIRR) or NPV alongside IRR for better decisions.
How do I calculate IRR for uneven cash flows?
IRR requires iterative calculation since there is no closed-form formula. Input the initial investment as a negative number and all subsequent cash flows by period. Example: invest $100K (Year 0), receive $30K (Year 1), $40K (Year 2), $50K (Year 3), $20K (Year 4). The IRR is the rate where NPV = -100 + 30/(1+r) + 40/(1+r)² + 50/(1+r)³ + 20/(1+r)⁴ = 0. This equals approximately 13.7%. Use a financial calculator or spreadsheet — Excel IRR() function handles this automatically.
What is the difference between IRR and MIRR?
Modified IRR (MIRR) fixes IRR reinvestment assumption by using a specified reinvestment rate (typically WACC or a safe rate) for positive cash flows and a finance rate for negative flows. Example: a project with 35% IRR but only 10% reinvestment opportunity has MIRR closer to 18%. MIRR is more conservative and realistic. Use MIRR when IRR seems unrealistically high or when comparing projects with very different cash flow patterns.