How to use the IRR calculator
The calculator has two tabs. Use Fixed cash flow when you invest once, add or take out the same amount every period and know what the investment is worth at the end: enter the initial investment, how long you hold it, the ending balance and the regular deposit or withdrawal. Use Irregular cash flow for a project or a property with different amounts each year: enter the initial investment and the cash flow of every year, with money you put in later as a negative number.
The result is the IRR as a yearly rate, the total return in dollars, the gross return as a percent of the money invested and a chart of what you put in against what you earned. The results update as you type.
What is the internal rate of return?
The internal rate of return (IRR) is the yearly rate at which the money going into an investment and the money coming out are worth the same today. Put another way, it is the discount rate that makes the net present value (NPV) of all the cash flows zero:
0 = CF0 + CF1 / (1 + IRR) + CF2 / (1 + IRR)2 + … + CFn / (1 + IRR)n
- CF0 is the initial investment, a negative number because the money goes out;
- CF1 … CFn are the cash flows of each year, positive when you receive money and negative when you put more in;
- n is the number of years.
There is no direct formula for the IRR once there are more than two cash flows, so it is found by trial: the calculator tries rates, checks whether the NPV is above or below zero and narrows the range until the NPV is zero to within a fraction of a cent. Because the IRR counts when each dollar is paid, it is the fair way to compare investments with different timing, such as rental properties, business projects, private loans or funds.
IRR example with uneven cash flows
A project costs $50,000, needs another $10,000 in year 1, then returns $30,000 in year 2 and $50,000 in year 3. These are the default inputs of the Irregular cash flow tab. The IRR is 12.446% a year: discounted at that rate, the cash flows add up to zero.
| When | Cash flow | Value today at 12.446% |
|---|---|---|
| Today | −$50,000 | −$50,000 |
| Year 1 | −$10,000 | −$8,893 |
| Year 2 | $30,000 | $23,726 |
| Year 3 | $50,000 | $35,167 |
| Total | $20,000 | $0 |
If you could earn 8% elsewhere, the NPV at 8% is $6,153, so the project beats that alternative. At 15% the NPV is −$3,136, so it falls short. The IRR is the rate where the answer changes.
IRR example with regular withdrawals
You invest $10,000, take out $100 at the end of every month, and after 2 years and 6 months the investment is worth $15,000. You received $3,000 along the way, so the total return is $8,000 and the IRR is 29.768% a year. These are the default inputs of the Fixed cash flow tab.
What is a good IRR?
An investment is worth making when its IRR is higher than the return you could get elsewhere at a similar risk, often called the hurdle rate or the cost of capital. Businesses often use 8% to 15%. For a rough comparison, high-quality bonds pay a few percent a year, and stocks have returned about 7% to 10% a year over the long run. A riskier project should beat those numbers by a clear margin, because its cash flows are only estimates.
IRR vs ROI, NPV and XIRR
- ROI is the total gain as a percent of the money invested and ignores time. The ROI calculator also gives an annualized ROI for a single investment.
- NPV is the value today of all the cash flows at a rate you choose, in dollars. The IRR is the rate at which the NPV is zero. The present value calculator discounts a single future amount or a series of payments.
- XIRR is the IRR of cash flows on exact dates instead of evenly spaced periods. For deposits and withdrawals on different dates, use the average return calculator.
- Payback period is how long it takes to get the money back. The payback period calculator also shows the cash flow return rate, the IRR of the years entered.
Limits of the IRR
- Reinvestment. The IRR assumes that the money you receive is reinvested at the same rate. When that rate is high, the real gain is often lower. The modified IRR (MIRR) uses a reinvestment rate you choose: for the project above, with 8% for both borrowing and reinvesting, the MIRR is 11.62% instead of 12.446%.
- Size. The IRR is a percent, not dollars. Turning $1,000 into $1,500 in a year is an IRR of 50%, while $100,000 into $120,000 is 20%, but the second one earns $19,500 more. Compare the NPV or the total return as well.
- Several or no answers. When the cash flows change sign more than once, for example a big repair in the middle of a project, there can be more than one rate with an NPV of zero, or none. The calculator shows the lowest one it finds.
- Estimates. The result is only as good as the cash flows you enter. Try a lower ending balance or smaller yearly amounts to see how sensitive the IRR is.
How to calculate IRR in Excel or Google Sheets
Put the cash flows in a column, the initial investment first as a negative number, and use =IRR(A1:A4). For the project above the values are -50000, -10000, 30000, 50000, and IRR returns 12.446%. The function assumes the cash flows are one period apart. For exact dates, use =XIRR(values, dates), and for a chosen reinvestment rate, =MIRR(values, finance_rate, reinvest_rate).
IRR is also used in the rental property calculator, which works out the IRR of a rental from its cash flow and sale price, and in the mutual fund calculator, which shows the IRR after fees.