Compute IRR for a series of cash flows. Year 0 is the initial investment (typically negative).
IRR
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Sum of cash flows (NPV @ 0%)
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Your breakdown
Updates live as you type| Year | Cash flow |
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What a single percentage hides
The internal rate of return compresses a messy series of cash flows into one annualized number. Formally, it is the discount rate that makes the net present value of every cash flow equal zero. Informally, it is the yearly return your money earned given exactly when the cash went out and came back. That is its appeal and its danger. A project that pays back early can post the same IRR as one that pays back late, and a deal that returns a fortune in raw dollars can show a mediocre IRR if the money takes too long to arrive. This calculator solves for the rate numerically, searching for the value that zeroes out the NPV, so you can compare investments on a consistent footing.
Why timing beats totals
The most important thing to internalize about IRR is that timing dominates. Two investments can return identical total dollars and have very different IRRs purely because of when the cash arrives. Money received in year one can be reinvested and compounded; money received in year ten cannot. That is why a quick flip with a modest profit often beats a long hold with a larger profit on an IRR basis. The tool wants at least one negative cash flow, your initial outlay, and at least one positive cash flow, your returns, or the rate is undefined. Year 0 is your upfront investment, entered as a negative number, and the later years hold whatever the deal pays back.
A rental deal at 15.9%
Picture a rental property. You invest $100,000 upfront, entered in year 0 as an outflow of ($100,000). It throws off $15,000 of net cash flow each year for nine years, and in year 10 you collect the final $15,000 plus $120,000 from the sale, for $135,000 that year. The raw profit is large, but the IRR tells you the annualized return.
The deal earns about 15.94% a year. Notice that the total cash flows sum to $170,000, which is the net present value at a 0% discount rate, but the IRR of 15.94% is the rate at which that NPV collapses to zero. To use the result, compare it to your required return, sometimes called your hurdle rate. If you demand 8% and the deal returns 15.94%, it clears the bar comfortably and is worth doing. The chart shows the single outflow below the axis and the inflows above it.
Where IRR quietly lies to you
IRR is powerful but it has sharp edges. First, it assumes you can reinvest every interim cash flow at the IRR itself; if the rest of your money only earns 6%, a 15.94% IRR overstates what you will actually achieve, and the modified internal rate of return exists to correct for this. Second, a cash-flow stream that flips sign more than once, say an outflow, then inflows, then a big outflow for a renovation, can mathematically produce more than one IRR. Third, IRR ignores scale: a 30% return on $1,000 looks better than a 15% return on $1 million, yet the second makes you far richer. Always read IRR alongside the total dollars earned and the size of the investment, never on its own.
What is the difference between IRR and ROI?
ROI measures total return as a simple percentage of what you put in, with no regard for time. If you double your money, your ROI is 100% whether it took one year or ten. IRR builds time directly into the answer, so doubling your money in one year is a 100% IRR while doubling it over ten years is only about 7.2% a year. For a one-shot, short-term decision, ROI is fine. For anything that pays out over multiple years, IRR is the more honest measure because it accounts for how long your capital was tied up.
What IRR should I require on an investment?
Your hurdle rate should reflect what you could earn elsewhere at similar risk. A broad stock index has returned roughly 7% to 10% a year over long periods, so many investors will not commit to an illiquid or risky private deal unless it projects well above that, often 15% or more, to compensate for the extra risk and the lack of liquidity. The riskier and less liquid the investment, the higher the IRR you should demand. If a deal only projects the same return as an index fund but carries far more risk, the index fund is the better choice.
Why does my calculator show no IRR?
IRR is only defined when there is at least one negative cash flow and at least one positive one. If you enter all positive numbers, or all negative, there is no rate that makes the net present value zero, and the tool will tell you it needs both signs. The standard pattern is a negative figure in year 0 for your initial investment followed by positive returns in later years. If you are seeing no result, check that your upfront outlay is entered as a negative number.