Internal Rate of Return Calculator

Finding Your Investment's True Yield

Internal rate of return (IRR) reveals the discount rate at which an investment breaks even—where NPV equals zero. The calculator determines the effective annual return of any cash flow pattern, making IRR essential for comparing investments with different structures, amounts, and timing.

IRR answers: "What annual return does this investment actually earn?" Whether evaluating rental properties, business projects, or complex investments, IRR provides a single percentage that captures total return.

One number, full picture.

What IRR Represents

IRR is the discount rate where:

Present Value of Inflows = Present Value of Outflows

Or equivalently:

NPV = 0

An investment with $100,000 outflow and $150,000 inflow after 3 years has IRR of approximately 14.5%—that's the effective annual return.

Basic IRR Calculation

Investment: $50,000 Returns: $65,000 after 2 years

Solving: $50,000 = $65,000 / (1 + IRR)²

IRR = √($65,000 / $50,000) - 1 = 14.0%

More complex cash flows require iterative solving—the calculator handles this automatically.

Multi-Period IRR Example

Initial investment: $100,000 Year 1: $20,000 Year 2: $30,000 Year 3: $40,000 Year 4: $35,000 Year 5: $25,000

Total received: $150,000 IRR: ~12.5%

Despite 50% nominal gain, time value makes true return 12.5% annually.

IRR Decision Rule

Compare IRR to required return (hurdle rate):

IRR > Hurdle rate: Accept investment IRR < Hurdle rate: Reject investment IRR = Hurdle rate: Indifferent

If your hurdle rate is 10% and IRR is 15%, the investment exceeds requirements.

IRR vs. Simple Return

Simple return ignores timing:

Invest $100,000 Receive $150,000 over 5 years Simple return: 50%

IRR accounts for when cash flows occur—early returns are worth more than late returns, even if totals are identical.

Real Estate IRR Example

Rental property investment:

Purchase: $300,000 Annual cash flow: $18,000 (years 1-7) Sale price: $380,000 (year 7) Selling costs: $25,000

IRR captures both ongoing income and appreciation, accounting for timing of all cash flows.

Private Equity IRR

Fund investment:

Capital call year 1: $250,000 Capital call year 2: $150,000 Distribution year 4: $100,000 Distribution year 5: $200,000 Distribution year 7: $450,000

IRR accounts for irregular calls and distributions, providing single return metric.

Multiple IRR Problem

Some cash flow patterns produce multiple IRRs:

Year 0: -$100,000 (investment) Year 1: +$300,000 (windfall) Year 2: -$200,000 (cleanup cost)

Sign changes can create multiple mathematical solutions—use NPV profile to identify reasonable interpretation.

Modified IRR (MIRR)

MIRR addresses reinvestment assumption:

Regular IRR assumes reinvestment at IRR rate MIRR specifies separate reinvestment rate

More conservative and often more realistic for high-IRR projects.

IRR vs. NPV Comparison

Use both; NPV typically preferred for decisions.

Project Ranking Conflict

IRR and NPV may rank differently:

Project A: Invest $10,000, IRR = 25% Project B: Invest $100,000, IRR = 18%

By IRR: Choose A (higher percentage) By NPV at 10%: B may have higher NPV (larger scale)

When conflicts exist, NPV typically guides better decisions.

Gross vs. Net IRR

Gross IRR: Before management fees Net IRR: After all fees

Private equity fund: Gross IRR: 18% Management fees: 2% annually Carried interest: 20% of profits Net IRR: ~13%

Net IRR reflects actual investor return.

Time-Weighted vs. Money-Weighted

IRR is money-weighted (sensitive to cash flow timing):

Good returns when balance high: Higher IRR Good returns when balance low: Lower IRR

Time-weighted return ignores deposit/withdrawal timing—better for manager evaluation.

Benchmark Comparison

Compare IRR to relevant benchmarks:

Real estate IRR: 12% S&P 500 (same period): 10% Risk-free rate: 4%

Outperformance: 2% vs. S&P 500, 8% vs. risk-free (but with different risk profiles).

Annualized vs. Cumulative

Convert between measures:

Cumulative return over 5 years: 75% Annualized (IRR): (1.75)^(1/5) - 1 = 11.8%

Annualized figures enable comparison across different time periods.

Cash-on-Cash vs. IRR

Different perspectives:

Cash-on-cash: Annual cash flow / Cash invested IRR: Total return including appreciation and timing

$30,000 down payment, $3,600 annual cash flow: Cash-on-cash: 12% IRR (including property appreciation): 18%

Using the Calculator

Enter initial investment, periodic cash flows (by period), and any terminal value.

The calculator shows:

• Internal rate of return
• NPV at various discount rates
• Payback period
• Cash flow timeline visualization
• Sensitivity to timing changes

Model scenarios: What's the IRR if sale price differs? How does holding period affect return? What cash flow achieves your target IRR?

Use results to evaluate and compare investment opportunities on a consistent return basis.

---

IRR distills complex cash flow patterns into a single annual return percentage, enabling comparison across investments with different structures and timings. The calculator solves for the rate that makes NPV zero—revealing whether an investment meets your return requirements. Know your true yield before committing capital.