Internal rate of return calculator

Our Internal Rate of Return (IRR) calculator helps you determine the profitability of investments or projects.

Ian Hawkins

Page written by Ian Hawkins. Last reviewed on May 10, 2024. Next review due April 6, 2025.

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This calculator is intended for illustration purposes only and exact payment terms should be agreed with a lender before taking out a loan.

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Internal rate of return (IRR)

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Definitions:

  • Initial investment: The initial amount of capital invested.
  • Investment return (including initial): The total cash flows generated by the investment, including the initial investment and any subsequent returns.
  • Time period: The duration over which the investment generates returns, typically expressed in years.

What is IRR?

IRR, or Internal Rate of Return, is a financial metric used to assess the profitability of an investment. It represents the annualized rate of return at which the net present value (NPV) of all cash flows from the investment equals zero. In simpler terms, IRR is the rate at which an investment breaks even, considering both the size and timing of cash flows.

IRR uses:

IRR is commonly used by investors and businesses to assess the attractiveness of investment opportunities, compare competing projects and make informed decisions about capital allocation. It provides a standardized method for evaluating the potential returns of different investments, taking into account the time value of money.

Limitations of IRR:

One limitation is that it assumes reinvestment of cash flows at the calculated IRR, which may not always be feasible. Additionally, IRR may produce multiple values or no real solution in certain cases, making interpretation challenging. As with any financial metric, it is important to consider IRR alongside other factors when making investment decisions.

FAQs

Net Present Value (NPV) is another key financial metric used in investment analysis. It represents the difference between the present value of cash inflows and the present value of cash outflows over a given time period. A positive NPV indicates that the investment is expected to generate profit, while a negative NPV suggests potential losses.

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