IRR Calculator: Internal Rate of Return
Personal financeFreeNo sign-up
The internal rate of return (IRR) is the yearly rate that makes the present value of a project’s cash flows equal its cost. A $1,000 investment that returns $1,100 after a year has an IRR of 10%.
Paying $50,000 to receive 5 years of cash flows totaling $85,000 gives a net present value of $16,572 at a discount rate of 8.00% and an internal rate of return of 18.77%. The project clears your required return.
Year-by-year
| Year | Cash flow | Discount factor | Present value | Running total |
|---|---|---|---|---|
| 0 | −$50,000 | 1.0000 | −$50,000 | −$50,000 |
| 1 | $12,000 | 0.9259 | $11,111 | −$38,889 |
| 2 | $15,000 | 0.8573 | $12,860 | −$26,029 |
| 3 | $18,000 | 0.7938 | $14,289 | −$11,740 |
| 4 | $20,000 | 0.7350 | $14,701 | $2,961 |
| 5 | $20,000 | 0.6806 | $13,612 | $16,572 |
Show the steps
- Discount each cash flow: PV = cash flow ÷ (1 + 8.00%)^year.
- Add the present values of all inflows: $66,572.43.
- Subtract the initial investment: $66,572.43 − $50,000.00 = $16,572.43.
- The IRR is the rate that makes the NPV zero: 18.765%.
NPV and IRR
NPV = −C0 + Σ Ct ÷ (1 + r)^t
IRR: the rate r where NPV = 0
- Cash flows are assumed to arrive at the end of each year, with the investment made at time zero.
- NPV is the better guide when comparing projects of different sizes. IRR can mislead when cash flows change sign more than once.
Estimates for planning and learning, not financial, tax, legal or medical advice. Check figures with your lender, tax preparer or doctor before you act.
About this calculator
Businesses and investors use NPV and IRR to decide whether a project is worth its cost. Both look at the money going out and the money coming back in, and both account for the fact that cash received later is worth less than cash received today.
Enter the amount you invest now and the cash you expect each year. The calculator returns NPV, IRR, the simple and discounted payback periods and the profitability index.
How to use it
- Enter the initial investment.
- Enter the cash flow for each year, in order, separated by commas. Use a minus sign for years when you pay money out.
- Enter your discount rate, which is the return you require.
- Read the NPV, IRR and payback, and check the cumulative chart.
How to read the results
- NPV above zero: the project beats your required return. Accept it.
- IRR above the discount rate: the same signal as a positive NPV.
- Profitability index above 1: each dollar invested returns more than a dollar in present value.
- Payback: how long until you recover the investment. It ignores what happens afterward.
Worked example
You invest $50,000 and receive $12,000, $15,000, $18,000, $20,000 and $20,000 over five years. At an 8% discount rate the NPV is about $16,572 and the IRR is about 18.8%, so the project clears the 8% hurdle.
Sources
Quick check: test yourself
What does a positive NPV mean?
Correct answer: The project earns more than the discount rate. A positive NPV means the discounted inflows exceed the cost.
The IRR of a project is the rate at which…
Correct answer: NPV equals zero. IRR is the discount rate that makes the NPV zero.
You invest $1,000 and receive $1,100 in a year. What is the IRR?
Correct answer: 10%. 1,100 ÷ 1,000 − 1 = 10%.
Pick an answer for each question.
Common questions
What is NPV?
Net present value is the present value of future cash flows minus the initial investment.
What is IRR?
The discount rate at which the NPV of a project is zero.
What is a good IRR?
One higher than your cost of capital or the return you could earn elsewhere.
Why can IRR be misleading?
When cash flows change sign several times, a project can have more than one IRR. NPV does not have this problem.
NPV or IRR?
Use NPV to choose between projects. Use IRR to describe a project’s return as a percentage.
More personal finance calculators
Related to This Article
More math articles
- Drawing Conclusions and Making Predictions
- Decimals in Action: How to Master Multiplication and Division
- How to Find the Area of a Triangle: Every Formula Explained
- Judicial review
- How to Find the Number of Solutions to a Linear Equation?
- How to Organize Data?
- How to Multiply Decimals and Whole Numbers?
- Derivative of Polar Coordinates: How to Find dy/dx
- 3rd Grade Ohio’s State Tests Math Worksheets: FREE & Printable
- Virginia Grade 2 Math Worksheets — Free Printable PDFs
What people say about "IRR Calculator: Internal Rate of Return - Effortless Math"?
No one replied yet.