IRR Calculator
The IRR (Internal Rate of Return) Calculator helps you find the annualized rate of return for a series of cash flows. IRR is the discount rate at which the net present value of all cash flows equals zero. It is widely used in capital budgeting, real estate analysis, and investment comparison. A higher IRR indicates a more profitable investment. This calculator is particularly useful for comparing investments with different cash flow patterns, such as real estate with rental income, business ventures, or projects with irregular cash flows.
Formula
IRR = rate where NPV = 0 0 = Σ [CFt ÷ (1 + IRR)^t] for t = 0 to n CFt = cash flow at time t n = total number of periods If IRR > required return, the investment is profitable.
Example
If you invest $10,000 (Year 0) and receive $3,000, $4,000, $5,000 in Years 1-3: 0 = −$10,000 + $3,000/(1+r) + $4,000/(1+r)^2 + $5,000/(1+r)^3 Solving for r: IRR ≈ 10.2% If your required return is 8%, this investment is profitable (IRR > 8%).
How to Use
- Enter your initial investment as a negative cash flow (Year 0)
- Enter expected cash inflows for each year
- The calculator finds the rate that makes NPV = 0
- Compare the IRR to your required return rate
- If IRR exceeds your required return, the investment is profitable
Frequently Asked Questions
What is the difference between IRR and ROI?
ROI measures total return as a percentage of investment. IRR is the annualized rate of return that accounts for the time value of money. IRR is more accurate for comparing investments with different time horizons or irregular cash flows.
What is a good IRR?
A good IRR depends on the investment type and risk. For real estate, 8-12% is typical. For stocks, 10-15%. For venture capital, 20%+. Compare IRR to your required return or the cost of capital. If IRR exceeds your required return, the investment is worthwhile.
Can IRR be negative?
Yes. If the total cash flows are less than the initial investment, IRR is negative. This means the investment loses money. A negative IRR indicates you should avoid the investment.
What is the difference between IRR and MIRR?
IRR assumes reinvestment at the IRR rate. MIRR (Modified IRR) uses a more realistic reinvestment rate (typically the cost of capital). MIRR is generally considered more accurate for comparing investments.
How is IRR used in capital budgeting?
Companies use IRR to evaluate projects. If IRR exceeds the cost of capital, the project adds value. When comparing projects, the one with the highest IRR is typically chosen, subject to budget constraints and risk assessment.