IRR Calculator — Internal Rate of Return
Calculate the Internal Rate of Return (IRR) for a series of cash flows. Enter your initial investment (negative) and subsequent returns to find the discount rate that makes the NPV zero. See also ROI Calculator and Compound Interest Calculator.
How to Calculate 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 effective compounded return rate of an investment. To calculate IRR, you need a series of cash flows: typically a negative initial investment followed by positive returns over time. The IRR is found iteratively using numerical methods like Newton's method, since there is no closed-form solution for most cash flow series.
IRR Formula
NPV = Σ (CFₜ / (1 + IRR)ᵗ) = 0
Where:
CFₜ = Cash flow at time t
IRR = Internal Rate of Return (the unknown)
t = Time period (0, 1, 2, ...)
Solved iteratively using Newton's method:
IRR(n+1) = IRR(n) − NPV(IRR(n)) / NPV'(IRR(n))
Example Calculation
Cash Flows: -$10,000, $3,000, $4,000, $5,000, $3,000
Find rate r where:
-10000 + 3000/(1+r) + 4000/(1+r)² + 5000/(1+r)³ + 3000/(1+r)⁴ = 0
IRR ≈ 16.82%
Total invested: $10,000 | Total returned: $15,000
IRR Reference Table
| Scenario | Cash Flows | IRR |
|---|---|---|
| Even returns | -10K, 3K, 3K, 3K, 3K | 7.71% |
| Growing returns | -10K, 1K, 2K, 4K, 8K | 13.07% |
| Front-loaded | -10K, 8K, 4K, 2K, 1K | 22.30% |
| Single payoff | -10K, 0, 0, 0, 15K | 10.67% |
| Quick return | -5K, 6K | 20.00% |
Frequently Asked Questions
What is a good IRR?
A good IRR depends on the context. For venture capital, 25-35% is typical. For real estate, 15-20% is considered strong. For corporate projects, any IRR above the company's cost of capital (often 8-12%) is generally acceptable.
What is the difference between IRR and ROI?
ROI measures total return as a percentage of the initial investment without considering the time value of money. IRR accounts for when cash flows occur, giving a time-weighted annualized return. IRR is more useful for comparing investments with different timing patterns.
Can IRR be negative?
Yes. A negative IRR means the investment lost money — the total returns were less than the initial investment. This happens when the sum of positive cash flows is less than the absolute value of the initial investment.
What are the limitations of IRR?
IRR assumes reinvestment at the IRR rate itself, which may be unrealistic. It can also produce multiple solutions when cash flows change sign more than once. For mutually exclusive projects, NPV is often a better decision metric than IRR.