An IRR calculator finds the internal rate of return, the yearly rate at which an investment’s cash flows have a net present value of zero. Formula: Cash flows: solve NPV(r) = Σ CF_t ÷ (1+r)^t = 0; Newton accepted only if |NPV| is near zero, otherwise bisection. Simple: (inflow ÷ outflow)^(1/years) − 1. Turning $100,000 into $160,000 over 5 years is an IRR of about 9.86%.
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How to use the IRR calculator
- For a single investment, enter the outflow, the final inflow and the years.
- For yearly cash flows, enter them comma-separated, starting with the negative outlay.
- Read the IRR as an annual percentage.
How the IRR calculator works
The internal rate of return is the discount rate that makes the net present value of a series of cash flows equal to zero. The IRR calculator has two modes. With one outflow and one final inflow it uses the compound annual growth rate formula. With a list of yearly cash flows it solves NPV = 0 by Newton’s method:
- Simple: IRR = (inflow ÷ outflow)1/years − 1
- List: find r so that Σ CFt ÷ (1 + r)t = 0, starting from 10%
If you fill in the cash flow list with two or more values, the IRR calculator uses the list and ignores the outflow, inflow and years fields.
IRR calculator worked example
Invest $100,000 and receive $160,000 after 5 years: (1.6)1/5 − 1 = 9.856% a year. Now enter the list −100000, 30000, 30000, 30000, 30000, 30000: the first value is the year-0 outflow and each later value is the net cash at the end of a year. The IRR calculator returns about 15.24%, much higher than the lump-sum case, because cash comes back sooner.
| Cash flows | Mode | IRR |
|---|---|---|
| −$100,000 then $160,000 | 5 years | 9.856% |
| −$10,000 then $20,000 | 10 years | 7.177% |
| −$50,000 then $60,000 | 2 years | 9.545% |
| −100000, 30000 ×5 | list | 15.238% |
| −10000, 3000, 4000, 5000 | list | 8.896% |
Using IRR to compare projects
Compare the IRR with your required return or cost of capital. If the IRR is higher, the project earns more than the hurdle rate. IRR is useful for ranking investments of different sizes because it is a percentage, but it assumes cash received along the way can be reinvested at the same rate, which may be optimistic. For that reason analysts often check NPV at a realistic discount rate as well.
Pitfalls
- Cash flows that change sign more than once can have more than one IRR; the tool flags this and returns one of them.
- Cash flows must be evenly spaced, one per year; monthly flows give a monthly rate.
- Include all costs, such as maintenance, fees and taxes, in each year’s net figure.
Estimates for education only, not financial advice. Your lender’s figures are final.
IRR and net present value
Net present value discounts each cash flow back to today at a chosen rate and adds them up. When NPV is positive at your hurdle rate, the project earns more than that rate; the IRR is simply the rate where NPV crosses zero. For the five-year $30,000 example, NPV at 10% is about $13,724, and it falls to zero at 15.24%, which is why the IRR calculator reports that figure.
When two projects are mutually exclusive, NPV and IRR can point in different directions. A small project might have a higher IRR but add less value in dollars than a larger one. Many finance texts suggest choosing by NPV in that case and using IRR as a second check. Also compare like with like: a pre-tax IRR should be compared with a pre-tax hurdle rate.
Using IRR for property and private deals
For a rental property, enter the down payment and closing costs as the negative first value, each year’s cash flow after expenses and loan payments, and add the expected sale proceeds after the loan payoff to the final year. Private investment sponsors often quote IRR targets; ask for the cash flow assumptions behind the number, and run them through the IRR calculator yourself to see how sensitive the result is to the sale price and timing.
Related converters and calculators
Related calculators:
- ROI calculator: return on investment
- Average return calculator: average returns
- Investment calculator: growth
- Compound interest calculator: compounding
Sources
Investor.gov (SEC): Compound annual growth rate; Investor.gov (SEC): Compound interest.
Formula and method
Cash flows: solve NPV(r) = Σ CF_t ÷ (1+r)^t = 0; Newton accepted only if |NPV| is near zero, otherwise bisection. Simple: (inflow ÷ outflow)^(1/years) − 1.
Requires at least one negative and one positive cash flow, shows NPV at the result and the method used, and warns when multiple IRRs may exist.
Questions about this calculator
What is IRR?
The discount rate that makes NPV zero.
Is IRR the same as CAGR?
For one outflow and one inflow, yes.
What should the first cash flow be?
The initial outlay, entered as a negative number.
Can there be two IRRs?
Yes, if cash flows change sign more than once.
Are the flows yearly?
Yes, one value per evenly spaced period.
Check the assumptions and units before relying on a result. Financial, tax and health estimates do not replace advice for your individual circumstances.
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