How to use the IRR Calculator (Internal Rate of Return)
- Enter the initial investment.
- Enter the cash inflow expected in each of the next five years.
- Read the IRR, total inflows and net gain.
- Compare the IRR with the return you require, or with other investments.
Formula used
IRR is the rate r that solves: 0 = −Investment + Σ CFₜ ÷ (1 + r)ᵗ. It is found numerically by repeatedly narrowing a range of rates until the equation balances.
Worked example
Here is the IRR Calculator (Internal Rate of Return) worked through with the example values shown above, so you can check each step by hand.
| Inputs | |
|---|---|
| Initial investment | $10,000 |
| Cash inflow, year 1 | $3,000 |
| Cash inflow, year 2 | $3,500 |
| Cash inflow, year 3 | $4,000 |
| Cash inflow, year 4 | $4,000 |
| Cash inflow, year 5 | $4,000 |
| Result | |
| Internal rate of return | 23.32% |
| Total inflows | $18,500 |
| Net gain (inflows − investment) | $8,500 |
What the number means
For a $10,000 investment returning $3,000, $3,500, $4,000, $4,000 and $4,000, the IRR is 23.32% a year. Total inflows are $18,500, a net gain of $8,500 over five years.
The IRR is the rate at which discounting the inflows brings them exactly back to the amount invested. If your required return is lower than the IRR, the project clears the hurdle.
Timing matters
Earlier cash flows raise the IRR. Returning $6,000, $6,000 and $3,000 in the first three years ($15,000 in all) gives an IRR of 26.31%, while $2,000 a year for four years and $3,000 in the fifth ($11,000 in all, only $1,000 more than the cost) gives just 3.07%.
That is why IRR rewards fast returns, and why two projects with the same total profit can have very different IRRs.
How it is found
There is no direct formula for IRR with several cash flows, so the calculator searches for the rate that makes the net present value zero, narrowing a range of rates 200 times. It looks between 0% and 10,000% a year.
If total inflows do not exceed the investment, the IRR would be zero or negative, and the calculator asks you to check the numbers instead.
Limits of IRR
IRR assumes you can reinvest the cash flows at the same rate, which is often too optimistic for a very high IRR. When a project has cash flows that switch between positive and negative, there can be more than one IRR, or none, and NPV is a safer guide.
For comparing projects of different size or length, look at NPV as well. Use the NPV calculator to see the money value at your required rate.
Frequently asked questions
What is IRR?
The discount rate at which the net present value of an investment’s cash flows is zero, effectively its yearly return.
What is a good IRR?
One that beats your required return after allowing for risk. What counts as good depends on the asset and the market.
How is IRR different from ROI?
ROI ignores timing. IRR takes into account when cash is received, so it is a yearly rate.
Why does the calculator show an error?
If inflows do not exceed the investment, there is no positive IRR.
Can there be more than one IRR?
Yes, if cash flows change sign more than once. This tool uses inflows only, so it avoids that.
Is IRR the same as CAGR?
Only when there is a single investment and a single payout. With several cash flows, IRR is the more general measure.
This calculator gives estimates for information only. Actual figures from a bank, employer, tax authority or doctor may differ. It is not financial, tax, legal or medical advice.