# Internal rate of return calculator

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

Page written by Ian Hawkins. Last reviewed on May 17, 2024. Next review due March 1, 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.

Internal rate of return (IRR)

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Return above investment

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## What is internal rate of return?

Internal rate of return (IRR) is a financial metric used to evaluate the profitability of an investment. It represents the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) from an investment equals zero. In simple terms, IRR is the break-even interest rate for your investment.

IRR is useful when you want to compare different investments or projects. The higher the IRR, the more profitable the investment.

## How to calculate internal rate of return?

• Determine the initial investment (negative cash outflow).
• Estimate the cash flows generated by the investment over its lifetime.
• Choose a discount rate (usually the cost of capital or required rate of return).
• Use trial and error or financial software to find the discount rate that makes the net present value (NPV) of the cash flows equal to zero.

## Using IRR eith WACC

WACC (Weighted average cost of capital) is often used as the discount rate when calculating IRR. It represents the average cost of a company’s various sources of financing, including equity and debt. Using WACC ensures that the IRR calculation takes into account the company’s capital structure and the required returns for all investors.

## IRR vs. compound annual growth rate

While IRR and compound annual growth rate (CAGR) both measure investment returns over time, they differ in calculation and interpretation. IRR considers the timing and magnitude of cash flows, whereas CAGR only considers the beginning and ending values. IRR is used to evaluate specific investments, while CAGR is used to measure the overall growth rate of an investment or asset.

## Limitations of IRR

• Multiple IRRs: Projects with unconventional cash flow patterns may result in multiple IRRs, making interpretation challenging.
• Reinvestment assumption: IRR assumes reinvestment of cash flows at the calculated rate, which may not reflect actual market conditions.
• Size bias: IRR may favour projects with smaller initial investments and shorter durations.