Internal Rate of Return Calculator
IRR is the rate at which the present value of future cash flows equals the initial investment. It is the project's own implied return — useful for ranking, but tricky when cash flows change sign more than once.
What IRR represents
IRR is the discount rate r that makes NPV equal to zero. It can be read as "if I invested elsewhere and earned IRR each year, I'd end up with the same money I get from this project." An IRR above your hurdle rate is good news; below it, you're better off in the alternative.
There is no closed-form solution; calculators iterate (this one uses bisection from a wide bracket). When cash flows change sign more than once — borrow, invest, borrow again — there can be multiple IRRs that satisfy the equation. In those cases, IRR alone is uninterpretable; use NPV.
Why IRR is popular and dangerous
IRR is intuitive: a single percentage that summarizes a project. It's also unitless, which means a $1,000 project with a 60% IRR ranks above a $10M project with a 22% IRR — even though the second creates vastly more dollar value. Use IRR to screen projects against a hurdle rate; use NPV to choose between projects competing for the same capital.
The reinvestment assumption
IRR implicitly assumes intermediate cash flows can be reinvested at the IRR itself. For a project with a 35% IRR, this assumes you have other 35% opportunities sitting around — usually you don't. Modified IRR (MIRR) addresses this by separating financing rate from reinvestment rate. MIRR is more honest; pure IRR is more common.
Worked example
A pilot program costs $100,000 today and produces cash flows of $30,000, $40,000, $45,000, and $35,000 over the next four years. IRR is 18.4%. If the company's hurdle rate is 12%, the project clears comfortably. NPV at 12% is $13,432; NPV at 18.4% is roughly zero, confirming the IRR.
What IRR doesn't account for
- Project scale. A high IRR on a small project beats a moderate IRR on a large project on a per-dollar basis but loses on absolute value.
- Sign changes. Multiple IRRs (or none) appear when cash flows cross zero more than once.
- Reinvestment. The implicit reinvestment-at-IRR assumption flatters projects with high early cash flows.
- Time horizon. IRR ignores the duration of the cash flow stream beyond what the math captures; a higher IRR over two years vs. a lower one over ten can be a hard choice.