IRR Calculator
Find the internal rate of return (IRR) of an investment from its cash flows, with the payback period and a year-by-year table.
Results
| Item | Value |
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Year by year
| Year | Cash flow | Value today at the IRR | Running total |
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Quick Answer
IRR is the yearly rate that makes the net present value (NPV) of all cash flows equal zero. If you invest $10,000 and get back $3,000, $4,000, $5,000 and $2,000 over four years, the IRR is about 15.32%. An investment is usually worth it if its IRR is higher than your required return.
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Table of Contents
- IRR Calculator
- Quick Answer
- Related Calculators
- How This IRR Calculator Works
- How to Use the IRR Calculator
- Core Formula
- Key Terms
- Worked Example
- Real-Life Examples
- IRR vs ROI vs NPV
- IRR for Equal Yearly Returns
- Reading Your IRR
- Common Mistakes to Avoid
- Frequently Asked Questions
- References & Sources
How This IRR Calculator Works
Enter what you invest today and the cash you expect to get back each year. The calculator searches for the rate at which the value today of all the cash flows adds up to zero. That rate is the IRR. It also shows how long it takes to get your money back and what each year’s cash is worth today at the IRR.
Quick explanation: IRR is the yearly return your money earns while it is tied up in the investment.
- Higher IRR: a better return for the money and time.
- Compare: accept projects with an IRR above your cost of capital or target return.
- Timing matters: cash that comes back sooner raises the IRR.
How to Use the IRR Calculator
- Enter the initial investment as a positive number.
- Enter the cash flow for each year, one per line. Use a minus sign for more money put in.
- Press Calculate.
- Read the IRR, payback period and money multiple.
- Check the year-by-year table to see what each cash flow is worth today.
Core Formula
0 = CF₀ + CF₁ ÷ (1 + IRR) + CF₂ ÷ (1 + IRR)² + … + CFₙ ÷ (1 + IRR)ⁿ
- CF₀: the initial investment, as a negative number.
- CF₁ to CFₙ: the cash flow at the end of each year.
- Solving: there is no simple formula, so the rate is found by trial, narrowing in on the answer.
Key Terms
- Internal rate of return (IRR): the discount rate that makes the NPV of all cash flows equal zero.
- Cash flow: money coming in (positive) or going out (negative) in a period.
- Net present value (NPV): the total value today of all cash flows at a chosen discount rate.
- Hurdle rate: the lowest return a company or investor will accept.
- Payback period: how long it takes for cash flows to repay the initial investment.
Worked Example
You buy equipment for $50,000 and it saves $15,000 a year for five years.
- Cash flows: −50,000, then 15,000 each year for 5 years
- At 15%, NPV = $282. At 16%, NPV = $-886
- The IRR is between them, at about 15.24%
Real-Life Examples
- A rental property: $60,000 down, $4,000 rent profit a year for 4 years, then $75,000 from the sale in year 5 (plus that year’s $4,000) gives an IRR of about 10.70%.
- Solar panels: $18,000 that saves $2,200 a year for 15 years has an IRR of about 8.75%.
- A small business loan: lending $20,000 and getting back $6,000 a year for 4 years earns an IRR of about 7.71%.
- Comparing projects: project A at 13.1% beats project B at 11.8%, even though B pays more in total, because A pays back sooner.
IRR vs ROI vs NPV
- IRR: a yearly rate that takes the timing of each cash flow into account.
- ROI: total gain as a percent of cost. It ignores how long it took.
- NPV: the dollar value an investment adds today at your chosen rate. Positive is good.
- How they connect: NPV at the IRR is zero, so if your required rate is below the IRR, NPV is positive.
IRR for Equal Yearly Returns
A negative IRR means you get back less than you put in.
| Yearly cash flow | 3 years | 5 years | 10 years |
|---|---|---|---|
| $1,500 | -31.34% | -8.88% | 8.14% |
| $2,000 | -21.76% | 0.00% | 15.10% |
| $2,500 | -13.11% | 7.93% | 21.41% |
| $3,000 | -5.09% | 15.24% | 27.32% |
| $4,000 | 9.70% | 28.65% | 38.45% |
| $5,000 | 23.38% | 41.04% | 49.08% |
Reading Your IRR
- Compare with a hurdle rate: many businesses use their cost of capital, such as 8% to 12%.
- Size matters too: a small project with a high IRR may earn fewer dollars than a large one with a lower IRR.
- Reinvestment: IRR assumes cash can be reinvested at the same rate, which may be too hopeful.
- Uneven timing: for exact dates, use a spreadsheet XIRR function.
Common Mistakes to Avoid
- Entering the investment as a cash flow. Put it in the initial investment box only.
- Forgetting the sale value. Add what you get when you sell to the last year’s cash flow.
- Comparing IRRs of very different sizes. Also check NPV in dollars.
- Mixing monthly and yearly cash flows. This calculator uses one cash flow per year.
- Ignoring sign changes. Cash flows that switch between positive and negative can have more than one IRR.
Frequently Asked Questions
It depends on the risk. Many businesses want an IRR above their cost of capital, often 10% or more. Real estate investors often look for 12% to 20%.
By finding the rate that makes the net present value of all cash flows zero. It is solved by trial, which this calculator does for you.
Yes. A negative IRR means you get back less money than you put in.
CAGR uses only the start and end values. IRR uses every cash flow in between, so it handles income along the way.
It works like one. A loan’s IRR, from the lender’s side, equals its effective interest rate.
If cash flows change from negative to positive and back again, the NPV equation can have more than one solution.
Put the cash flows in cells, with the first one negative, and use =IRR(range). Use XIRR when the dates are uneven.
Modified IRR. It assumes reinvestment at a rate you choose instead of the IRR, which is often more realistic.
No. It is a percentage, so also check the dollar profit or NPV when comparing projects.
If the total cash back is less than the investment, the IRR is negative. If no rate works, the calculator says so.
Yes, but this calculator assumes yearly cash flows. For monthly ones, find the monthly IRR in a spreadsheet and convert it: (1 + monthly IRR)¹² − 1.
Money returned early can be used again, so the same total is worth more, and the rate is higher.
References & Sources
| Source | Used For | Link |
|---|---|---|
| Corporate Finance Institute, Internal rate of return (IRR) | Definition, formula and uses. | https://corporatefinanceinstitute.com/resources/valuation/internal-rate-return-irr/ |
| Wikipedia, Internal rate of return | Formula, multiple IRRs and MIRR. | https://en.wikipedia.org/wiki/Internal_rate_of_return |