The IRR (Internal Rate of Return) calculator finds the discount rate at which the Net Present Value of a series of cash flows equals zero. It's the most widely used metric for comparing investment projects and is central to private equity, real estate, and corporate finance.
How to Use This Calculator
- Enter the initial investment (negative value — cash out).
- Enter the expected cash inflows for each period (year 1, year 2, etc.).
- Click Calculate to see IRR and compare it against your required rate of return (hurdle rate).
What This Calculator Measures
- IRR — The compound annual return rate at which NPV = 0; the effective annual return of the investment.
- Hurdle rate — The minimum acceptable return set by the investor or company (often 8–15%).
- Cash flow timeline — The sequence of outflows (investments) and inflows (returns).
- Decision rule — Accept if IRR ≥ hurdle rate; reject if IRR < hurdle rate.
Formula or Logic
IRR is the rate r that satisfies:
0 = Σ [Cash Flow_t ÷ (1 + r)^t]
There is no closed-form solution — IRR is found through iterative numerical methods (the calculator does this automatically).
Example Calculations
Example 1: Invest −$100,000 today. Receive $30,000/year for 5 years. IRR ≈ 15.24%. If the hurdle rate is 12%, accept the project.
Example 2: Real estate deal: −$200,000 initial, $18,000/year for 7 years + $240,000 sale at year 7. IRR ≈ 12.8%.
Understanding Your Results
Private equity firms typically target IRRs of 20–30%. Real estate deals commonly target 10–15%. Corporate projects usually need to beat WACC (8–12%) to be approved.
Common Mistakes to Avoid
- Using IRR when cash flows change sign more than once (multiple IRRs are possible — use MIRR instead).
- Comparing IRRs for projects with different durations without adjusting for scale or reinvestment assumptions.
- Assuming intermediate cash flows can be reinvested at the IRR rate — Modified IRR (MIRR) corrects this.
- Choosing a higher-IRR project that has a lower NPV than a larger competing project.