IRR Calculator

Find your investment’s internal rate of return using fixed values or custom cash flow timelines. View IRR, annual return, net gain, and more.

What is IRR (Internal Rate of Return)?

The Internal Rate of Return or IRR is a metric to evaluate the profitability of an investment by estimating the rate of return over time. Specifically, the internal rate of return is the discount value that makes the Net Present Value (NPV) of a project’s future cash flows equal to zero. Instead of asking, “What is this investment worth today?” like with NPV, IRR asks, “At what interest rate would this investment break even in today’s money?”

IRR is used in corporate finance, capital budgeting and personal investing to compare different projects or investment opportunities. It’s most useful at times when decision makers have multiple proposals of different sizes, durations, and complexities. If all other factors are equal, the project with the higher IRR is usually the one to go with. That’s because a higher IRR means higher expected returns for the same cost, assuming the investment meets or beats the required return rate, also known as the “hurdle rate” or cost of capital.

At the heart of IRR is the time value of money; the idea that money today is worth more than the same amount in the future because of its earning capacity. So to calculate IRR, each future cash flow is discounted back to its present value using the same rate (the IRR) and when the sum of these discounted cash flows equals the initial investment, that’s the internal rate of return. Mathematically, this can be a challenge as there’s no direct algebraic way to solve for IRR. Most analysts use financial calculators or spreadsheet software like Excel to “plug and chug” until the equation balances out, although the formula is conceptually simple.

IRR reflects the compound annual growth rate of a project, considering reinvestment of cash flows at the same rate. Though tools are used to find it out, IRR doesn’t account for external factors like inflation or varying reinvestment rates. That’s where the Modified Internal Rate of Return (MIRR) can be more accurate.

One key limitation is that IRR assumes consistent cash flows and can produce multiple values for projects with irregular inflows and outflows. It’s also sensitive to timing—early cash flows carry more weight due to discounting. Despite that, IRR is a go-to metric because it simplifies decision-making into a single, intuitive percentage that tells if a project clears the required return.

How to Calculate Internal Rate of Return – IRR Formula

The IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. Mathematically, it solves for r in:

Where:

• CF_t = Cash flow at time $t$
• r = Internal Rate of Return (IRR)
• n = Number of periods

The IRR is the value of r that satisfies this equation, where NPV = 0:

• C₀ is the initial investment (usually negative)
• C_n is the cash flow at time n
• r is the IRR

How IRR is Calculated (Numerical Method)

Since the IRR equation is non-linear, it cannot be solved algebraically and requires iterative numerical methods, such as:

1) Newton-Raphson Method (Most Common)

An iterative way that refines the guess for r:

Where:

• NPV(r_n) = Net Present Value at rate r_n​

• NPV′(r_n) = Derivative of NPV (slope at r_n​)

2) Trial-and-Error Method

• Guess different discount rates until NPV ≈ 0.

3) Excel/Financial Calculators

• Use built-in functions like =IRR(values, [guess]).

Example Calculation

Suppose we have the following cash flows:

IRR Equation:

To solve it numerically:

1. Begin with an initial guess (e.g., r₀​=10%).

2. Calculate NPV and its derivative.

3. Update r until NPV ≈ 0.

Final IRR ≈ 18.82% (found through iteration).

Key Notes

✅ IRR > Cost of Capital → Project is profitable.
❌ IRR < Cost of Capital → Project loses money.
⚠️ Multiple IRRs can occur if cash flows change direction more than once.

How to Use the IRR Calculator

Our IRR calculator is expertly built with two powerful modes that allow you to find the internal rate of return based on different financial scenarios:

Irregular Cash Flow Mode

This mode is used where your cash inflows vary from one period to the next. Let’s say you invest $8,000 upfront and expect to receive $2,000 in Year 1, $3,500 in Year 2, $2,500 in Year 3, and $4,000 in Year 4. Not all cash flows are the same, and that’s totally fine here.

To use this mode:

• Enter the initial investment (as a negative value).
• Type in the cash flows separated by commas (e.g., 2000, 3500, 2500, 4000).
• Select your period type: monthly, quarterly, or annually.

The tool then:

• Computes IRR based on the entered flows.
• Converts it into an annualized IRR for easy comparison.
• Shows the net cash flow, total periods, and tells you whether the investment was profitable based on the return rate output.

Example:

• Initial Investment: -$8,000
• Cash Flows: $2,000, $3,500, $2,500, $4,000
• Period Type: Annually

Result:

• IRR (Annual): ~14.62%
• Net Cash Flow: $4,000
• Investment Performance: Profitable

Fixed Cash Flow Mode

This mode is suitable when you know your holding period, the initial investment, the final account value, and if you had any regular deposits or withdrawals during the investment period.

Here’s how it works:

• Input the initial investment (say, $12,000).
• Enter the holding period in years and months.
• Provide the ending balance (e.g., $15,000).
• Optionally, enter recurring withdrawals or deposits (e.g., monthly withdrawals of $100).
• Choose the frequency (monthly, quarterly, annually).
• Enter the timing (at the start or end of each period).

The calculator makes a full monthly cash flow schedule, adjusting for frequency and timing of withdrawals/deposits, sums up the ending balance in the final month, and then:

• Calculates the monthly and annual IRR.
• Displays the net return.
• Shows the total deposits or withdrawals made during the investment.

Example:

• Initial Investment: $12,000
• Holding Period: 2 years and 6 months
• Ending Balance: $15,000
• Withdrawals: $100 monthly, end of each period

Result:

• Monthly IRR: ~0.89%
• Annual IRR: ~11.26%
• Net Return: $1,500
• Total Withdrawals: $3,000

Real-World Example: Irregular Cash Flow IRR

Let’s imagine a startup investment where you put in $20,000 and receive staggered returns:

• Year 1: $4,500
• Year 2: $6,000
• Year 3: $7,000
• Year 4: $8,000

Input these into the irregular mode as:

• Initial Investment: -20000
• Cash Flows: 4500, 6000, 7000, 8000
• Period Type: Annual

The internal rate of return calculator returns:

• IRR: ~14.95%
• Annual IRR: ~14.95%
• Net Cash Flow: $5,500
• Investment Performance: Profitable

You can see if this project meets your internal hurdle rate or if your money might do better elsewhere.

Real-World Example: Fixed Cash Flow IRR

Now let’s take a more structured investment scenario—perhaps a savings plan or bond investment where contributions or withdrawals are consistent and you know the starting and ending balances.

• You invest $25,000.
• The investment runs for 3 years and 0 months.
• The ending balance is $32,000.
• You make monthly withdrawals of $150 at the end of each month.

Here’s how to use this in Fixed Cash Flow Mode:

• Initial Investment: 25000
• Holding Period: 3 years, 0 months
• Ending Balance: 32000
• Withdrawal: 150, Frequency: monthly, Timing: end

Results:

• Monthly IRR: ~1.12%
• Annual IRR: ~14.33%
• Net Return: $3,200 (after adjusting for all withdrawals)
• Total Withdrawals: $5,400
• Performance: Profitable

This mode is great to deal with situations like retirement accounts, managed funds, or rental property returns; any investment with a consistent inflow/outflow component.

Understand the Results and Outputs

For both the irregular and fixed modes, the calculator returns a set of highly valuable outputs. Let’s break these down:

• IRR (by period type): It’s the raw internal rate of return that’s figured out according to the selected period (i.e., monthly, quarterly, or annual).
• Annual IRR: A normalized rate to easily compare with other investments. If your periods are monthly, the IRR is compounded to annual using the formula:

• Net Cash Flow / Net Return: It shows the overall gain or loss from your investment, after summing up all inflows and subtracting the initial investment.
• Total Periods / Holding Period: In irregular mode, it tells you the entered period. In fixed mode, it shows the time duration in years and months.
• Investment Performance: A friendly tag that tells if your investment generated a profit or not, based on whether the IRR was greater than 0.
• Total Deposits/Withdrawals: Only in fixed mode, this tells you how much was added or taken out of the investment, so you can evaluate return consistency.

Limitations and Considerations of IRR

Even though IRR is extremely useful element in investment projects, it’s not perfect. Here are a few points to keep in mind:

1. Multiple IRRs

In rare cases where cash flows change direction multiple times (e.g., inflow → outflow → inflow), more than one IRR can be the result of IRR mathematics. The tool avoids this by returning only the first accurate result via Newton-Raphson iteration. If it fails to converge, it prompts the user to re-check inputs.

2. Assumption of Reinvestment

IRR considers that interim cash flows are reinvested at the same internal rate of return. This can be unrealistic, especially in volatile markets. If more accurate modeling is required, you could explore Modified IRR (MIRR).

3. Sensitivity to Timing

Especially in the Fixed Cash Flow Mode, small timing changes like taking withdrawals at the beginning vs. the end of a month can impact or change the IRR. The internal return rate calculator smartly accounts for this with the “timing” radio button.

4. It’s Just One Metric

Internal rate of return doesn’t tell the full story. A high IRR project with low total dollar gain may still not be worth your time versus a lower IRR with a much larger payoff. For deep decision-making, consider using IRR alongside metrics including NPV, ROI, and Payback Period.

Frequently Asked Questions

What happens if the IRR Calculator doesn’t return a result?

Sometimes, especially with irregular cash flows that flip between negative and positive too many times, the IRR calculation can fail to converge. It’s a limitation of how IRR works. Mathematically, the IRR equation doesn’t always have a real solution, or it might have multiple IRRs that make it unclear about the correct metric.

If that happens, double-check your cash flows. You might need to:

• Reevaluate the direction and order of inflows/outflows.
• Try a different time scale (e.g., convert annual to monthly).
• Use an alternative metric like NPV or MIRR (Modified IRR) for more reliability in edge cases.

Is IRR still useful if the project doesn’t have regular income or if there are no profits?

Yes and no. IRR can still calculate a rate of return even when your net cash flow is negative, but the concept is different. It will no longer be a “profitability rate,” but a measure of how effectively your losses are recouped (if at all). Negative return rate means your investment is losing value over time. It’s still valuable insight—it simply tells you to stop proceeding or look for a better opportunity.

Can I compare IRR across different currencies or countries?

IRR by itself doesn’t account for currency exchange rates, inflation, or macroeconomic differences. It assumes all cash flows are in the same currency and time-adjusted fairly. So, to compare a US dollar project with one in Europe, IRR is not enough. In such cases, all amounts need to be converted to a common currency and adjusted for local interest rates, taxes, and inflation. Another way is to use NPV in real terms, or pair the internal rate of return with other metrics such as Payback Period or Discounted Cash Flow (DCF) to make a more informed decision.

Is IRR better for short-term or long-term investments?

IRR can be used for both, but the accuracy improves the more cash flow data you have. In long-term investments with uneven returns, the metric offers a clearer picture than ROI or CAGR. But for short-term investments (say under 6 months), IRR can be overly sensitive to small period changes, and it’s mainly true in the fixed mode. So, IRR is best used when your investment span is at least a few months and involves multiple cash flows. For very short-term gains, a simple ROI or profit margin serves you better.

Should I rely only on IRR to make an investment decision?

No, this is a common mistake. IRR is just one piece of the puzzle. It tells you the rate of return, but not the dollar value of profit (that’s NPV), how long until you recover your cost (that’s Payback Period), or what happens if you can’t reinvest at the same rate (that’s when MIRR helps). Think of IRR as your investment’s “engine horsepower,” but you still need to know how much fuel it needs (capital), how far it’ll go (return period), and how smooth the ride will be (risk and volatility).