IRR Calculator
Calculate the Internal Rate of Return (IRR) for a series of cash flows.
What this calculator does
The internal rate of return compresses a stream of cash flows into one annualised percentage: the rate at which the present value of everything received exactly matches what you paid in. It answers what the investment genuinely earned each year on the capital committed to it.
That is why IRR dominates discussion in private equity, property, and corporate appraisal. A percentage travels across deals of different sizes and lengths in a way a pound NPV does not, and it can be compared straight against a hurdle rate without any further calculation.
When to use it
IRR fits investments with a clear start, a run of cash flows, and an end — a rental property bought, let, and sold, a piece of plant, a business acquisition, or a fund holding with drawdowns and distributions.
It is also the correct measure of your own performance when contributions have been irregular. A time-weighted return tells you how the fund did; IRR tells you how you did, including the effect of when you happened to invest. The two can diverge by several percentage points.
Understanding the inputs
Starting amount is the initial outlay at time zero. The annual return field lets you set a comparison discount rate so you can judge whether the IRR clears your hurdle. Years is the number of periods across which cash flows arise.
The monthly addition field models regular contributions. Keep periodicity consistent — mixing annual cash flows with monthly ones without adjusting the rate is the commonest error in IRR work. Where cash flows fall on irregular dates, a spreadsheet XIRR calculation will be materially more accurate than an annual model.
How is this calculated?
IRR is the discount rate that makes NPV = 0. Solved iteratively: 0 = Σ CFt/(1+IRR)^t.
A worked example
Suppose you put £25,000 into a small business. It returns £6,000 at the end of year one, £8,000 in year two, £9,000 in year three, and £11,000 in year four, at which point the arrangement ends.
Total received is £34,000 against £25,000 invested, which looks like a 36 percent gain. The IRR, however, is 12.23 percent a year — the figure that properly reflects capital being returned gradually rather than all at the end. That 12.23 percent is what you would compare against a global tracker.
Limitations and assumptions
IRR assumes interim cash flows are reinvested at the IRR itself, which flatters high-return projects. It ignores scale entirely, can produce several answers when cash flow signs reverse more than once, and rewards speed in a way that can favour a quick small win over a larger, slower one.
It is also only as sound as the forecast cash flows, and the exit value usually dominates the result. Past returns do not predict future ones and the model assumes a flat return with no volatility. This is not investment advice — run NPV alongside IRR for anything significant.
Common Questions
- What is the internal rate of return?
- The discount rate at which a project's net present value comes to zero — in effect, the annualised return earned on the capital tied up. If the IRR exceeds your cost of capital, the project should create value. There is no algebraic solution, so it is found by iteration.
- What counts as a good IRR?
- It only means anything against a hurdle. UK corporates commonly set hurdle rates above their weighted average cost of capital, often in the 12 to 15 percent range. Private equity targets 20 percent or higher. For personal investing, the fair comparison is a low-cost global tracker over the same period.
- How does IRR differ from NPV?
- IRR gives a percentage, NPV gives a pound figure. IRR communicates well but ignores scale — a 40 percent return on £5,000 creates far less wealth than 15 percent on £2 million. Where the two rank projects differently, standard finance theory says follow the NPV.
- What is the reinvestment assumption problem?
- IRR implicitly assumes every interim cash flow is reinvested at the IRR itself. For a project showing 35 percent, that assumes you can keep redeploying cash at 35 percent, which is seldom realistic. Modified IRR corrects this by letting you specify an achievable reinvestment rate, usually giving a materially lower figure.
- Can there be more than one IRR?
- Yes, whenever the cash flow signs change more than once — a project that costs money, then generates it, then demands a large decommissioning payment at the end. North Sea and mining projects show this pattern regularly. Where multiple IRRs exist the measure is unusable and NPV should be used instead.
- Is IRR the same as money-weighted return?
- Yes, mathematically. Money-weighted return, which some platforms label your personal rate of return, is simply an IRR applied to your contributions and withdrawals. It reflects your timing decisions, unlike a time-weighted return, which deliberately removes them to measure the fund's own performance.
- How do I calculate IRR on a buy-to-let?
- Treat the deposit, stamp duty, and purchase costs as the time-zero outflow, annual net rental income after mortgage interest and costs as the interim flows, and the net sale proceeds after the mortgage is repaid as the final inflow. Remember that mortgage interest relief is restricted to a basic rate tax credit.
- Does IRR handle irregular dates?
- The standard calculation assumes equal annual periods. For cash flows on arbitrary dates you need XIRR, which discounts by actual days elapsed. Applying annual IRR to quarterly or irregularly timed flows will give a wrong answer, and the error widens as the timing becomes more uneven.
- How is IRR actually solved?
- By iteration. A solver guesses a rate, computes the NPV, and refines the guess until NPV is near enough to zero, typically using Newton-Raphson which converges within a few steps for normal cash flows. No closed-form formula exists because the underlying polynomial has no general solution above fourth degree.