IRR Calculator
Find the discount rate that makes the net present value of a series of cash flows equal to zero, helping you evaluate project profitability
Formula
0 = Σ [CFt / (1 + IRR)^t]
IRR is the discount rate that makes NPV equal to zero. Higher IRR indicates higher annualized return.
Worked Examples
Example 1: Simple Investment
Problem:Invest $50,000, receive $15,000/year for 5 years.
Solution:Cash flows: -50000, 15000, 15000, 15000, 15000, 15000\n\nTotal returns: $75,000\nProfit: $25,000\n\nIRR calculation yields ~15.2%
Result:IRR = 15.2%
Example 2: Real Estate
Problem:Buy property for $200,000, rent for 5 years, sell for $250,000.
Solution:Year 0: -$200,000\nYears 1-5: $18,000/year rent\nYear 5: +$250,000 sale\n\nTotal inflows: $340,000\nIRR ≈ 12.5%
Result:IRR = 12.5%
Example 3: Compare Projects
Problem:Project A: -$100k, +$150k in year 3. Project B: -$100k, +$40k/year for 3 years.
Solution:Project A IRR:\n(150/100)^(1/3) - 1 = 14.5%\n\nProject B IRR:\n~9.7% (iterative)\n\nA has higher IRR but B has better cash flow timing.
Result:A: 14.5%, B: 9.7%
Frequently Asked Questions
What is IRR?
Internal Rate of Return is the discount rate that makes NPV equal to zero. It represents the annualized return of an investment considering the time value of money.
How is IRR different from ROI?
ROI = (Gain - Cost) / Cost, ignoring timing. IRR accounts for when cash flows occur. $100 returned in year 1 is worth more than $100 in year 5.
What are IRR limitations?
IRR assumes reinvestment at the IRR rate, which may be unrealistic. Multiple IRRs possible with alternating cash flows. Doesn't account for project size or timing preferences.
How does IRR relate to NPV?
IRR is the discount rate where NPV = 0. If your required return < IRR, NPV is positive (good investment). If required return > IRR, NPV is negative (reject).