Enter Your Cash Flows
Initial cost is negative; each year is a net cash inflow.
Internal Rate of Return
0%
Calculate the Internal Rate of Return implied by an initial investment and up to 5 years of future cash flows.
Initial cost is negative; each year is a net cash inflow.
0%
IRR is the discount rate at which an investment's Net Present Value equals exactly zero. It's the annualized return the cash flows imply, solved for directly rather than assumed in advance like with NPV.
NPV(IRR) = 0 = Σ [CFⁿ / (1 + IRR)ⁿ] − Initial Investment
IRR answers a specific question: what constant annual rate of return, applied to every cash flow in the series, makes the Net Present Value of the investment exactly zero? Because there's no closed-form algebraic solution for IRR in most cases, it's typically found by iteration — testing rates until the resulting NPV converges to zero, which is exactly what this calculator does behind the scenes.
NPV requires you to choose a discount rate upfront and tells you the dollar value created at that rate. IRR flips the question: it solves for the rate itself, which is useful when you don't have a firm discount rate in mind, or when comparing investments of different sizes where a percentage return is more intuitive than a dollar figure. That said, NPV is generally considered more reliable when comparing mutually exclusive projects of different scale, since IRR alone doesn't tell you how large the actual dollar value created is — a small investment with a very high IRR might create less total value than a larger one with a more modest IRR.
IRR assumes that any interim cash flows are reinvested at the same IRR rate, which may not be realistic, especially for very high calculated IRRs. Cash flow patterns that switch sign more than once (negative, then positive, then negative again) can also produce multiple mathematically valid IRRs or none at all, which is a known limitation of the metric for unusual project structures. For straightforward investments with one upfront cost and a stream of positive returns, this concern rarely applies.
Internal Rate of Return (IRR) is the discount rate at which an investment's Net Present Value equals zero. It represents the annualized return the investment is expected to generate.
NPV gives a dollar value of expected value created at a chosen discount rate. IRR instead solves for the rate itself, answering what annualized return the cash flows imply, without you needing to pick a discount rate in advance.
A good IRR is one that exceeds your required rate of return or cost of capital for that risk level. There's no universal number; it depends on what alternative investments of similar risk could offer.
Prefer a dollar value at a chosen rate? Use the NPV Calculator, or compare a simple growth rate with the CAGR Calculator.
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