IRR Calculator

What is IRR (Internal Rate of Return)?

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. In simpler terms, it's the annualized rate of return you can expect from an investment based on its projected cash flows. Our IRR calculator uses the Newton-Raphson iterative method to solve for the rate that satisfies this equation.

How to Use This IRR Calculator

• Enter your initial investment amount (the upfront cost)
• Specify the number of years you expect to receive cash flows
• Input the expected cash flow for each year
• The IRR calculator will compute your internal rate of return automatically
• Review the NPV at various discount rates to understand sensitivity

Interpreting Your IRR

• IRR > 15%: Excellent return - significantly above market averages
• IRR 10-15%: Good return - competitive with market returns
• IRR 7-10%: Moderate return - similar to historical market averages
• IRR < 7%: Below average return - may not meet hurdle rate
• IRR < 0%: Negative return - investment loses money

IRR vs Other Metrics

While IRR is a powerful tool, it has limitations compared to other investment metrics:

• IRR vs ROI: ROI is simpler but doesn't account for the time value of money or cash flow timing
• IRR vs CAGR: CAGR measures growth between two points; IRR accounts for intermediate cash flows
• IRR vs NPV: NPV gives an absolute dollar value; IRR gives a percentage rate
• Limitation: IRR assumes cash flows are reinvested at the IRR rate (often unrealistic)

IRR Calculator Formula

The IRR is found by solving: NPV = CF₀ + CF₁/(1+IRR)¹ + CF₂/(1+IRR)² + ... + CFₙ/(1+IRR)ⁿ = 0

Where CF₀ is your initial investment (negative), and CF₁ through CFₙ are your cash flows over n periods. This IRR calculator uses the Newton-Raphson iterative method to find the rate that satisfies this equation.

Common Uses for IRR

• Real Estate Investing: Evaluate rental properties with irregular cash flows
• Business Projects: Assess capital expenditure decisions and project viability
• Private Equity: Measure performance of investments with multiple capital calls and distributions
• Corporate Finance: Compare competing projects and allocate capital efficiently