Internal Rate of Return Calculator
Calculate the IRR to evaluate investment profitability and compare project returns
IRR Calculator
Initial Investment
Initial cash outflow at time zero
Annual Cash Flows
Positive values = cash inflows, Negative values = cash outflows
IRR Analysis Results
Investment Analysis
Project Duration: 5 years
IRR: 22.72%
Project Status: Excellent
Risk Level: High Return/High Risk
Decision Guidelines
vs. Typical Savings (2-3%): ✅ Better
vs. Market Average (8-10%): ✅ Better
vs. High-Yield Bonds (5-7%): ✅ Better
Recommendation: Strong Buy
IRR Analysis
IRR Formula & Calculation
IRR Formula
Formula: 0 = -C₀ + C₁/(1+IRR) + C₂/(1+IRR)² + ... + Cₙ/(1+IRR)ⁿ
Where:
- C₀ = Initial investment
- C₁, C₂, ... Cₙ = Cash flows for years 1, 2, ... n
- IRR = Internal Rate of Return (what we solve for)
Your Calculation
Initial Investment: $6,000
Cash Flows:
- Year 1: $2,000
- Year 2: $2,000
- Year 3: $2,000
- Year 4: $2,000
- Year 5: $3,000
Calculated IRR: 22.72%
IRR Interpretation
High IRR (>15%)
Excellent investment opportunity with high returns
Good IRR (10-15%)
Solid investment beating market averages
Fair IRR (5-10%)
Moderate returns, compare with alternatives
Poor IRR (<5%)
Low returns, may not justify risk
IRR vs Other Metrics
IRR vs NPV
IRR gives rate of return; NPV gives absolute value
IRR vs ROI
IRR considers time value; ROI is simple ratio
IRR vs Payback
IRR considers all cash flows; payback ignores later flows
IRR Limitations
Multiple IRRs possible with alternating cash flows
Assumes reinvestment at IRR rate
Doesn't consider project scale differences
May favor shorter-term projects
Use with NPV for complete analysis
Understanding Internal Rate of Return (IRR)
What is IRR?
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a project equal to zero. It represents the effective compound annual return rate that an investment will generate.
Key Concepts
- •Time Value of Money: Money today is worth more than money tomorrow
- •Cash Flow Timing: Earlier cash flows are more valuable
- •Discount Rate: The rate used to discount future cash flows
- •NPV = 0: At IRR, the project breaks even in present value terms
IRR Applications
Investment Analysis
Compare different investment opportunities on a standardized basis.
Capital Budgeting
Evaluate and rank corporate projects and capital expenditures.
Real Estate
Analyze rental properties, developments, and real estate investments.
Business Valuation
Determine the attractiveness of business acquisitions or expansions.