📊 IRR Calculator
Calculate the Internal Rate of Return for your investments and cash flows
Cash Flows
Enter your cash flows below. Initial investment should be negative (outflow). Subsequent cash flows can be positive (inflows) or negative (outflows).
Cash Flow Summary
| Period | Cash Flow | Present Value |
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📊 How IRR Calculations Work
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a project or investment equal to zero. It represents the annualized effective compounded return rate of an investment.
The formula for NPV is:
Where:
- NPV = Net Present Value
- Ct = Cash flow at time t
- r = Discount rate (IRR)
- t = Time period
This calculator uses an iterative numerical method (Newton-Raphson) to solve for the IRR that makes NPV equal to zero. The algorithm starts with an initial guess and iteratively improves the estimate until it converges on an accurate solution.
IRR is particularly useful for:
- Comparing the profitability of different investments
- Evaluating capital budgeting decisions
- Assessing the potential return of projects with irregular cash flows
- Making investment decisions when the discount rate is unknown
Note that IRR has some limitations, including the assumption that positive cash flows are reinvested at the IRR rate, which may not be realistic in practice.
IRR (Internal Rate of Return) is the discount rate that makes the net present value (NPV) of all cash flows from a project or investment equal to zero. It's important because it allows investors to compare the profitability of different investments regardless of their size or timing. A higher IRR generally indicates a more desirable investment. IRR is widely used in capital budgeting, private equity, venture capital, and corporate finance to evaluate investment opportunities and make strategic decisions.
A 'good' IRR depends on the context: the industry, risk level, and alternative investment opportunities. Generally, an IRR above the company's cost of capital or hurdle rate is considered acceptable. For many businesses, an IRR of 15-25% is considered good, but this varies widely by industry and risk profile. Venture capital investments might seek IRRs of 30% or more to compensate for high risk. Real estate investments might target 10-15%, while stable infrastructure projects might be acceptable at 8-12%. The appropriate benchmark depends on factors like risk, liquidity, and investment horizon.
IRR has several limitations: 1) It assumes that positive cash flows are reinvested at the IRR rate, which may not be realistic. 2) It can produce multiple solutions for projects with alternating positive and negative cash flows. 3) It doesn't account for project scale - a small project with high IRR might be less valuable than a large project with lower IRR. 4) It can be misleading when comparing projects with different durations. 5) It doesn't consider the cost of capital explicitly. 6) It can be difficult to calculate manually for complex cash flow patterns. These limitations have led to the development of alternative metrics like Modified IRR (MIRR) and Financial Management Rate of Return (FMRR).
IRR and ROI (Return on Investment) are both profitability measures but differ significantly. ROI is a simple ratio: (Gain from Investment - Cost of Investment) / Cost of Investment. It doesn't consider the time value of money or the timing of cash flows. IRR, on the other hand, accounts for the time value of money and provides an annualized rate of return. ROI gives a snapshot of overall profitability, while IRR shows the compound annual growth rate. For example, an investment that returns 100% over 10 years has a 100% ROI but only about 7.2% IRR, reflecting the time value of money.
Yes, IRR can be negative. A negative IRR indicates that the investment is losing money at the calculated rate. This means the present value of costs exceeds the present value of benefits when discounted at that negative rate. Negative IRRs typically occur when the total cash outflows exceed the total cash inflows, or when there are significant late-stage negative cash flows. While negative IRRs are mathematically possible, they can be difficult to interpret and may indicate a problematic investment. In practice, most investors would reject projects with negative IRRs unless there are strategic reasons to proceed despite the financial loss.