IRR Calculator
Calculate the Internal Rate of Return (IRR) for a series of cash flows.
What this calculator does
The internal rate of return converts a stream of cash flows into a single annualized percentage: the rate at which the present value of everything coming in exactly equals what you put in. It is the number that answers what did this investment actually earn per year on the money committed.
That framing is why IRR dominates conversation in private equity, real estate, and corporate capital budgeting. A percentage is comparable across deals of different sizes and durations in a way a dollar NPV is not, and it can be set directly against a hurdle rate without further work.
When to use it
IRR suits investments with an identifiable beginning, a series of cash flows, and an end — a rental property bought, operated, and sold, a piece of equipment, a business acquisition, or a fund investment with capital calls and distributions.
It is also the right measure for your own portfolio performance when you have been making irregular deposits. A time-weighted return tells you how the fund performed; IRR tells you how you performed, including the effect of when you chose to add money. Those two numbers can differ considerably.
Understanding the inputs
Starting amount is your initial investment, entered as the time-zero outflow. The annual return field lets you set a comparison discount rate so you can see whether the IRR clears it. Years is the number of periods over which cash flows occur.
The monthly addition field models recurring contributions. Be careful to keep the periodicity consistent — mixing annual cash flows with monthly ones without adjusting the rate is the most frequent source of error. If your cash flows fall on irregular dates, the XIRR approach in a spreadsheet is 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
You buy a rental property for $100,000 in cash. It nets $8,000 a year after all expenses for five years, and at the end of year five you sell it for $130,000, so that final year brings in $138,000 in total.
The IRR that sets the NPV of those flows to zero is 12.66 percent. Compare that with the naive calculation: $40,000 of rent plus $30,000 of appreciation on $100,000 looks like 70 percent, or 14 percent a year. IRR is lower because it correctly accounts for the appreciation arriving only at the end.
Limitations and assumptions
IRR assumes interim cash flows are reinvested at the IRR itself, which flatters high-return projects. It ignores project scale, can produce multiple answers when cash flow signs change more than once, and rewards speed in a way that can favor a quick small win over a larger slower one.
It is also only as reliable as the forecast cash flows, particularly the exit value, which usually dominates the result. Past returns do not predict future ones and the model assumes no volatility. This is not investment advice — for significant decisions, run NPV alongside IRR.
Common Questions
- What is the internal rate of return?
- The discount rate at which a project's net present value equals zero — effectively the annualized return the investment earns on the money tied up in it. If your IRR exceeds your cost of capital, the project is expected to create value. There is no closed-form solution, so it is solved iteratively.
- What is a good IRR?
- Only meaningful against a hurdle. Corporates typically set a hurdle rate above their cost of capital, often 12 to 15 percent. Private equity funds target 20 percent or more, reflecting leverage and illiquidity. For a personal investment, the honest benchmark is what an index fund would have delivered over the same period.
- How does IRR differ from NPV?
- IRR answers in a percentage, NPV in dollars. IRR is intuitive and easy to communicate but ignores project size — a 40 percent IRR on $5,000 creates far less wealth than 15 percent on $2 million. When the two rank projects differently, finance theory says follow NPV.
- What is the reinvestment assumption problem?
- IRR implicitly assumes every interim cash flow is reinvested at the IRR itself. For a project returning 35 percent, that assumes you can keep redeploying cash at 35 percent, which is rarely true. Modified IRR fixes this by letting you specify a realistic reinvestment rate, usually producing a noticeably lower figure.
- Can a project have more than one IRR?
- Yes, whenever the cash flow signs change more than once — a project that costs money, generates cash, then requires a large cleanup outlay at the end. Mining and decommissioning projects show this routinely. Multiple IRRs make the measure meaningless, and NPV should be used instead.
- How does IRR relate to money-weighted return?
- They are the same calculation. Money-weighted return, which brokerages sometimes call personal rate of return, is an IRR applied to your deposits and withdrawals. It captures the effect of your timing, unlike time-weighted return, which strips timing out to measure the underlying investment's performance.
- Why do private equity IRRs look so high?
- Several reasons, not all flattering. Leverage amplifies returns. Early distributions from quick exits raise the IRR disproportionately because IRR rewards speed. And subscription credit lines can defer capital calls, shortening the measured holding period. This is why the multiple on invested capital is reported alongside IRR.
- Does IRR work with irregular cash flow timing?
- The standard formula assumes annual periods. For cash flows on arbitrary dates, XIRR is the correct method, discounting by actual days elapsed. Using annual IRR on quarterly or irregular flows will produce a wrong answer, and the error grows with how uneven the timing is.
- How is IRR actually calculated?
- By iteration. The solver guesses a rate, computes NPV, and adjusts until NPV is close enough to zero — typically via Newton-Raphson, which converges in a handful of steps for well-behaved cash flows. There is no algebraic formula because the polynomial has no general solution beyond fourth degree.