IRR Calculator — Internal Rate of Return

IRR (Internal Rate of Return) is the discount rate at which an investment's net present value equals zero — the annualized return the cash flows imply. Enter your initial investment and annual cash flows below; the calculator solves IRR numerically, the same way the Excel model does.

The internal rate of return answers a question a simple profit figure cannot: what annual return does an investment earn once the timing of every cash flow is taken into account? It is the single discount rate that makes the net present value of all inflows and outflows exactly zero. Because it weights timing, receiving cash earlier lifts the IRR even when the total amount returned is unchanged — which is why it is the standard yardstick for comparing investments against a hurdle rate.

0 = −Investment + Σ CFt ÷ (1 + IRR)^t

Worked example (default inputs)

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What IRR actually measures

The internal rate of return is the single discount rate at which an investment's net present value equals zero — the annualised return the cash flows imply, accounting for exactly when each one arrives. Solve 0 = −Investment + Σ [CFₜ ÷ (1 + IRR)ᵗ] for IRR. Because it weights timing, cash received sooner lifts the IRR even when the total received is unchanged, which is why it is the standard yardstick for comparing investments against a hurdle rate.

A worked example

Invest $1,000 today and receive $150, $250, $350, $450 and $550 over five years. The net present value is positive at low discount rates and turns negative at high ones; the rate that makes it exactly zero — the IRR — is about 22%. Because that comfortably exceeds a typical 10–12% hurdle, both IRR and NPV say accept the project.

The reinvestment assumption — IRR's biggest flaw

IRR carries a hidden assumption that quietly overstates returns: it assumes every interim cash flow is reinvested at the IRR itself. For a project returning 30%, that means assuming you can redeploy each distribution at 30% — rarely true. McKinsey's Kelleher and MacCormack, in a widely cited cautionary analysis, showed how this assumption can make a project's real economic return look far higher than it is, and recommended the modified internal rate of return (MIRR), which reinvests at the cost of capital instead. When you see a headline IRR that looks too good, the reinvestment assumption is usually doing the flattering.

Reference: J. Kelleher & J. MacCormack, “Internal rate of return: A cautionary tale”, McKinsey.

Case study: when IRR and NPV disagree

Two projects compete for the same capital. Project A returns 40% IRR on a $50,000 outlay, creating $60,000 of NPV. Project B returns 18% IRR on a $2M outlay, creating $900,000 of NPV. IRR ranks A first; NPV ranks B first — by fifteen times the value. IRR ignores scale, so a high percentage on a tiny base beats a solid percentage on a large one every time, even though the large project creates vastly more wealth. When mutually exclusive projects of different size or timing conflict, follow NPV — it measures dollars created, which is what actually compounds.

The multiple-IRR trap

IRR can also break entirely. When cash flows change sign more than once — an outflow, then inflows, then a large decommissioning or earn-out outflow — the equation can have several mathematically valid IRRs, none of them meaningful. Mining, energy and infrastructure projects hit this routinely. NPV has no such ambiguity, another reason it is the primary decision rule and IRR the communication metric.

Why a fast 2x can beat a slow 3x

The clearest way to feel what IRR measures is a comparison the equity multiple gets wrong. Investment A doubles your money in two years; investment B triples it in eight. B returns more in total, so its multiple looks better — 3x against 2x. But A's IRR is about 41%, while B's is roughly 15%, because A frees the capital up fast enough to redeploy it. If you can reinvest, three back-to-back doublings over six years turn $1 into $8, leaving B far behind. This is the timing insight IRR captures and a raw multiple cannot: for an investor who can put returned capital back to work, speed compounds. The caveat from earlier applies here too — that logic only holds if the reinvestment is real, which is exactly what MIRR forces you to be honest about.

IRR in private equity and real estate

Despite the caveats, IRR dominates private markets because it captures the time-sensitivity that defines those returns — getting money back sooner genuinely matters to a fund with a fixed life. Private equity typically targets a 20–25%+ IRR over a three-to-five-year hold; real estate development aims for 15–20%, stabilised assets less. Practitioners always pair IRR with the equity multiple (total cash returned ÷ invested), because a 30% IRR held for eight months and a 30% IRR held for five years are very different outcomes that the percentage alone hides.

IRR versus the metrics it gets confused with

IRR sits among several return measures that are easy to mix up, and the differences matter. Return on investment (ROI) is a simple total gain over cost with no regard for timing — quick but crude, and it will rank a slow project the same as a fast one that returns identical dollars. The equity multiple is total cash returned divided by cash invested; it captures magnitude but, on its own, says nothing about how long the money was tied up. MIRR is IRR corrected for the unrealistic reinvestment assumption, reinvesting interim cash at the cost of capital. And cash-on-cash return, common in real estate, measures annual pre-tax cash flow against equity invested — a running yield rather than a lifetime return. Sophisticated investors quote several together, because each hides something the others reveal: IRR the timing, the multiple the magnitude, cash-on-cash the interim yield.

From the calculator to a full model

This calculator solves IRR numerically the same way a spreadsheet does — iterating until NPV hits zero. In a full model, equity IRR is computed on post-debt cash flows alongside NPV, payback period and the equity multiple, so you see the complete return picture rather than one number in isolation. The generated Excel model builds all of them as live formulas, free for a 3-year model.

Frequently asked questions

What is a good IRR?

It depends on risk: infrastructure deals target 8–12%, real estate 12–20%, venture investments 25%+. Compare IRR against your WACC or hurdle rate — value is created when IRR exceeds it.

How is IRR different from ROI?

ROI is a simple total return ignoring timing; IRR annualizes the return accounting for when each cash flow arrives. Earlier cash flows raise IRR.

Does the Excel model compute IRR?

Yes — the generated workbook computes equity IRR on post-debt cash flows with a live formula, alongside DCF enterprise value and payback period.

What are the limitations of IRR?

IRR can mislead when cash flows change sign more than once (producing multiple IRRs) or when comparing projects of very different scale. Pair it with NPV — which the calculator also reports — for a complete picture.

What is a good IRR?

It depends entirely on risk and asset class: infrastructure targets 8–12%, real estate 12–20%, and venture or buyout investments 20%+. The only universal test is whether IRR exceeds your cost of capital or hurdle rate — value is created only when it does.

What is the difference between IRR and MIRR?

IRR assumes interim cash flows are reinvested at the IRR itself, which often overstates the return. The modified IRR (MIRR) reinvests them at the cost of capital instead, giving a more realistic figure — especially for high-IRR projects where the reinvestment assumption does the most distorting.

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