IRR Calculator
Calculate the Internal Rate of Return (IRR) for your investments. Enter your initial investment and expected cash flows over time to determine the annualized rate of return that makes the net present value equal to zero.
Annual Cash Flows
How to Use This IRR Calculator
This IRR calculator helps you determine the annualized return rate for investments with multiple cash flows. Follow these steps to calculate your internal rate of return:
1. Enter your initial investment amount in the first field. This represents your cash outflow at Year 0 (the money you invest upfront).
2. Add annual cash flows for each year of the investment. These represent money coming back to you - rental income, business profits, dividends, or partial returns.
3. For the final year, include any sale proceeds, terminal value, or final payout in addition to that year's regular cash flow.
4. Use the "+ Add Year" button to add more years as needed. Remove years using the X button if you add too many.
5. Click "Calculate IRR" to see your internal rate of return, total cash inflows, net profit, and investment multiple.
What is Internal Rate of Return (IRR)?
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of all cash flows from an investment equal to zero. In practical terms, it represents the annualized effective compounded return rate that an investment is expected to generate over its lifetime.
IRR is widely used in real estate investing, private equity, venture capital, and corporate finance to evaluate and compare investment opportunities. Unlike simple ROI, IRR accounts for the time value of money and the timing of cash flows, making it particularly valuable for investments that generate returns over multiple years.
A higher IRR indicates a more attractive investment from a pure returns perspective. However, IRR should be considered alongside other factors like investment size, risk level, time horizon, and liquidity requirements when making investment decisions.
IRR Benchmarks by Investment Type
- 5-10% IRR: Conservative investments such as stabilized real estate with long-term tenants, core real estate funds, and high-grade bonds
- 10-15% IRR: Moderate investments including value-add real estate, balanced private equity, and growth-oriented funds
- 15-25% IRR: Higher risk investments such as real estate development projects, opportunistic funds, and leveraged buyouts
- 25%+ IRR: Venture capital, early-stage startups, distressed investments, and highly speculative opportunities
These benchmarks help investors set expectations and evaluate whether a potential investment meets their return requirements given its risk profile.
IRR Formula and Calculation
IRR is defined as the rate (r) that satisfies the equation:
0 = CF0 + CF1/(1+r) + CF2/(1+r)^2 + ... + CFn/(1+r)^n
Where CF0 is the initial investment (expressed as a negative number) and CF1 through CFn are the cash flows for each subsequent period.
Since there is no closed-form algebraic solution for IRR, it must be calculated using iterative numerical methods such as Newton-Raphson or bisection. This calculator uses the bisection method to find the rate that brings NPV closest to zero.
Limitations of IRR
While IRR is a valuable metric, it has important limitations. IRR assumes that interim cash flows can be reinvested at the same IRR rate, which may not be realistic. For comparing mutually exclusive projects of different sizes, Net Present Value (NPV) may provide better guidance. Additionally, investments with non-conventional cash flow patterns (alternating positive and negative flows) may have multiple IRRs or no real IRR solution.