IRR Calculator
Calculate the Internal Rate of Return (IRR) for your investments or projects. IRR is the discount rate that makes the net present value of all cash flows equal to zero.
IRR Results
Cash Flow Summary
IRR Interpretation
Enter cash flows to see IRR interpretation
Understanding Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of potential investments. It represents the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.
How IRR Works
IRR is calculated by finding the discount rate that equates the present value of expected cash inflows with the present value of expected cash outflows. In other words, it's the rate at which the investment breaks even.
NPV = 0 = CF0 + CF1/(1+r) + CF2/(1+r)² + ... + CF?/(1+r)n
Where: CF = Cash Flow, r = IRR, n = number of periods
IRR vs. Other Metrics
| Metric | Purpose | Advantages | Limitations |
|---|---|---|---|
| IRR | Rate of return on investment | Considers time value of money | May have multiple solutions |
| NPV | Absolute profitability | Shows dollar value of project | Requires discount rate assumption |
| Payback Period | Time to recover investment | Simple to understand | Ignores time value of money |
| ROI | Return on investment percentage | Easy to calculate | Doesn't account for time |
Interpreting IRR Results
- IRR > Required Rate: Investment is potentially profitable
- IRR < Required Rate: Investment may not be worthwhile
- IRR > Cost of Capital: Project creates value for investors
- Multiple IRRs: Can occur with unconventional cash flows
- No IRR Solution: May happen with all-negative cash flows
Common IRR Benchmarks
| Investment Type | Typical IRR Range | Risk Level |
|---|---|---|
| Government Bonds | 3-5% | Very Low |
| Corporate Bonds | 4-8% | Low-Moderate |
| Real Estate | 8-15% | Moderate-High |
| Private Equity | 15-25% | High |
| Venture Capital | 25-50%+ | Very High |
IRR Limitations
- Assumes Reinvestment: Assumes cash flows are reinvested at the IRR rate
- Multiple Solutions: Can occur with non-conventional cash flow patterns
- Scale Independence: Doesn't consider the size of the investment
- Time Bias: Favors projects with earlier cash flows
- Mutually Exclusive Projects: IRR may not work well for comparing different-sized projects
When to Use IRR
- Capital Budgeting: Evaluating investment opportunities
- Project Selection: Comparing mutually exclusive projects
- Performance Measurement: Assessing portfolio or fund performance
- Private Equity: Evaluating potential returns on investments
- Real Estate: Analyzing property investment returns
Tip: IRR is most useful when comparing projects with similar risk profiles and time horizons. Always consider IRR alongside other metrics like NPV, payback period, and qualitative factors when making investment decisions.