IRR (Internal Rate of Return) Calculator
This calculator determines the Internal Rate of Return (IRR) for a series of cash flows. Enter the initial investment (as a positive number) and the subsequent cash flows to evaluate the profitability of an investment.
Your Project's IRR
Enter investment and cash flows to find the IRR.
Understanding the Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is one of the most important metrics in capital budgeting and corporate finance. It represents the discount rate at which the Net Present Value (NPV) of all cash flows (both positive and negative) from an investment equals zero.
In simpler terms, IRR is the expected compound annual rate of return that an investment will generate. If the IRR of a project is higher than a company's minimum required rate of return (often called the hurdle rate), the project is generally considered a good investment.
How to Use This IRR Calculator
- Initial Investment: Enter the total cost of the investment made at the beginning (Time 0). Enter it as a positive number; the calculator will automatically treat it as a negative cash flow (an outflow).
- Cash Flow (Year 1, 2, ...): Enter the cash flow received (inflow) or paid (outflow) for each subsequent period. Use the "Add Cash Flow" button to add as many periods as you need. Positive numbers represent money received, while negative numbers represent additional money invested.
- Calculate: The calculator will solve for the percentage rate that makes the project's net value zero.
IRR vs. NPV (Net Present Value)
While IRR provides a percentage return, NPV gives you a specific dollar value representing the project's value-add to the company, discounted at a specific rate (the hurdle rate). They are two sides of the same coin:
- IRR tells you the rate of return you are getting.
- NPV tells you how much value the project creates at a given required return rate.
Generally, if a project's IRR > Hurdle Rate, its NPV will be positive. This is why IRR is so powerful for making go/no-go decisions on projects.
Limitations of IRR
While extremely useful, IRR has some limitations. In cases with non-conventional cash flows (e.g., a large negative cash flow in the middle of a project's life), there can be multiple IRRs, or none at all. In such scenarios, financial analysts often rely more heavily on the NPV metric. For most standard projects with an initial investment followed by positive returns, IRR is a reliable and intuitive measure of profitability.