Finance
IRR Calculator
Calculate the internal rate of return (IRR) from an initial investment and annual cash flows. Optionally compare against a hurdle rate.
Annual Cash Flows
Year 1
Year 2
Year 3
Enter initial investment and at least one positive cash flow to calculate IRR.
Advertisement
IRR Formula
Solve for r where NPV = 0
0 = −C₀ + Σ(CFₜ ÷ (1 + r)ᵗ)
r = IRR · C₀ = initial investment · CFₜ = cash flow in year t
IRR vs NPV: Which Should You Use?
NPV is preferred when comparing projects of different sizes — it gives a dollar value of the expected benefit.
IRR is preferred when communicating returns to stakeholders who think in percentages, or when comparing a project against a benchmark cost of capital.
For mutually exclusive projects, always rely on NPV. IRR can give misleading results when cash flows change sign multiple times.
Frequently asked questions
What is the Internal Rate of Return (IRR)?
IRR is the discount rate that makes the net present value (NPV) of all cash flows from an investment equal to zero. It represents the expected annualised return of a project. If IRR exceeds the cost of capital (hurdle rate), the project is generally worth pursuing.
How do you calculate IRR?
IRR is solved iteratively — there is no simple closed-form solution. It is the rate r that satisfies: 0 = −Initial Investment + Σ(Cash Flow_t ÷ (1 + r)^t). Numerical methods like Newton-Raphson or bisection are used to find r.
What is a good IRR?
A good IRR depends on the cost of capital and the risk of the project. A project with an IRR higher than the weighted average cost of capital (WACC) or your hurdle rate creates value. For real estate, 15–20% IRR is often considered strong. For venture capital, 25–30%+ is typical.
What is the difference between IRR and ROI?
ROI is a simple percentage of profit over cost, ignoring the time value of money. IRR is an annualised rate that accounts for the timing of cash flows. IRR is more useful for multi-year projects because it captures when money is received, not just how much.
What does a negative IRR mean?
A negative IRR means the project loses money in present-value terms — the sum of discounted cash flows never recovers the initial investment. Any project with a negative IRR should generally be rejected unless there are strategic reasons beyond financial return.