IRR Calculator — Internal Rate of Return
Enter your project's cash flows to calculate the Internal Rate of Return (IRR), Net Present Value (NPV), and payback period. Year 0 is typically the initial investment (negative value).
Cash Flows
How IRR Works
0 = CF₀ + CF₁/(1+IRR) + CF₂/(1+IRR)² + … + CFₙ/(1+IRR)ⁿ
IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. There is no closed-form solution — it is found iteratively. This calculator uses a bisection algorithm, which is robust for conventional project cash flows.
Worked Example
Initial investment of −$100,000 generating cash flows of $30K, $35K, $35K, $30K, $20K over 5 years:
- Total undiscounted cash inflows: $150,000
- Net undiscounted profit: $50,000
- IRR ≈ 17.1% — the investment earns 17.1% compounded annually
- At a 10% hurdle rate, NPV ≈ +$24,200 — accept the project
IRR Decision Rules
| IRR vs Hurdle Rate | Decision | Example |
|---|---|---|
| > 15% (strong) | Accept | New factory: IRR = 22%, hurdle = 15% |
| 12–15% | Likely accept | Software project: IRR = 13% |
| 8–12% | Borderline | Real estate: IRR = 10%, financing = 7% |
| < Cost of capital | Reject | IRR = 4%, WACC = 8% |
| Negative | Strong reject | Never profitable |
| Multiple IRRs | Caution | Non-conventional cash flows |
| IRR = WACC | Borderline | Exactly breaking even |
| Mutually exclusive | Use NPV | Pick higher NPV, not higher IRR |
How to Calculate IRR — Step by Step
IRR (Internal Rate of Return) is the discount rate that makes NPV = 0. It tells you the annualized return you'd earn on an investment. Higher IRR = better investment.
- 1List all cash flows with timing. Year 0: initial investment (negative). Years 1–N: expected returns (positive). Example: −$100,000 investment, then $30,000, $35,000, $40,000, $45,000 over 4 years.
- 2Set NPV = 0 and solve for the rate. IRR is where: −$100K + $30K/(1+r) + $35K/(1+r)² + $40K/(1+r)³ + $45K/(1+r)⁴ = 0. This requires iteration (trial and error) — calculators do this automatically.
- 3Compare to your hurdle rate. If your cost of capital (hurdle rate) is 10% and IRR = 17%, the investment creates value. If IRR < hurdle rate, reject the project.
- 4Watch for IRR limitations. IRR assumes reinvestment at the same rate (often unrealistic). Use Modified IRR (MIRR) for more realistic projections. Multiple sign changes in cash flows can produce multiple IRR values.
IRR Decision Benchmarks by Investment Type
| Investment Type | Typical Hurdle Rate | Strong IRR Target | Reject If IRR Below |
|---|---|---|---|
| Real estate (rental) | 7–9% | 12–15% | 7% |
| Private equity / buyout | 12–15% | 20–25% | 15% |
| Venture capital | 20–25% | 30%+ | 20% |
| Corporate project (S&P co.) | 8–12% | 15–20% | 10% |
| Infrastructure / utilities | 5–7% | 8–10% | 5% |
Frequently Asked Questions
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This calculator is for educational purposes only and does not constitute financial advice.