Calculate the Internal Rate of Return (IRR) for an investment based on an initial outlay and a series of future cash flows.
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. It's the annualized rate of return an investment is expected to generate, used to compare projects or investments with different cash flow timings.
Where CFₜ is the cash flow in period t, including the initial investment as a negative value at t=0. There's no closed-form algebraic solution, so IRR is found by testing rates iteratively (as this calculator does) until NPV reaches zero.
An initial investment of $10,000 that returns $3,000/year for 5 years has an IRR of roughly 15.2% — meaning the investment performs as if it earned a steady 15.2% annual return.
What's a good IRR? It depends on the investment type and risk — many investors compare IRR against their required rate of return or cost of capital; higher isn't automatically better if it comes with much higher risk.
What's the difference between IRR and ROI? ROI measures total return over the whole period without accounting for timing, while IRR annualizes the return and accounts for when each cash flow occurs.
Can IRR be negative? Yes — a negative IRR means the investment is expected to lose money overall, with cash inflows not enough to recover the initial outlay.
Why do some investments have multiple IRRs? When cash flows switch sign more than once (e.g., negative, positive, then negative again), the NPV equation can have more than one valid solution, making a single IRR ambiguous.
Is IRR calculator for rental property useful for real estate? Yes — real estate investors often use IRR to compare a property's purchase price, annual net cash flow, and eventual sale proceeds against other investment opportunities.