Calculate the Internal Rate of Return (IRR) of an investment from its initial cost and a series of cash flows. Find the annual return that makes the net present value of the project equal to zero.
Internal Rate of Return
The Internal Rate of Return is the annualized discount rate at which an investment's net present value (NPV) equals zero — in other words, the effective compound return the project earns over its life. You enter the upfront cost and the cash the investment returns each period, and IRR finds the single rate that exactly balances them. It's a cornerstone of capital budgeting: a project is generally worth pursuing if its IRR exceeds your required rate of return (hurdle rate) or cost of capital.
For example, investing $10,000 today and receiving $3,000, $4,000, $5,000, and $4,000 over the next four years gives an IRR of about 20.6% — meaning the project effectively compounds your money at 20.6% per year. Because there's no algebraic formula for IRR, it's found by iteration, which this calculator does automatically. Note that IRR assumes interim cash flows are reinvested at the IRR itself, which can overstate returns for very high-IRR projects.
IRR is the discount rate that makes the present value of all cash flows equal the initial investment.
Accept a project when IRR beats your required return or cost of capital; reject it when IRR falls short.
IRR assumes cash flows are reinvested at the IRR. For a more conservative view, compare with NPV or MIRR.
Internal rate of return is the discount rate at which a project's NPV is exactly zero — the break-even return implied by its own cash flows. It is expressed as a percentage, which makes it intuitive to compare against a cost of capital, and it accounts for the timing of every flow. There is no closed-form solution beyond simple cases, so it is found by iteration: guess a rate, compute NPV, and adjust until NPV reaches zero. Two cautions — a cash flow stream that changes sign more than once can have several valid IRRs, and IRR quietly assumes interim cash is reinvested at the IRR itself, which flatters high-return projects.
0 = Σ [ CF_t ÷ (1 + IRR)^t ] − C₀solve for IRR by iterationwhere:
Assumptions: Assumes conventional cash flows — one outflow followed by inflows. Compare IRR against your hurdle rate, and prefer NPV when ranking mutually exclusive projects of different sizes.
Invest $50,000 today and receive $20,000, $25,000 and $22,000 over three years. What return does that represent?
ResultIRR ≈ 15.9%
Total nominal return is $67,000 on $50,000 — 34% over three years. IRR converts that into an annual rate that properly credits the money returned early, which a simple average cannot do.