What does the IRR tell me?

It is the annualized return at which an investment breaks even in present-value terms. If the IRR exceeds your required rate of return, the project is generally worth pursuing; if it is lower, the project destroys value at your hurdle rate.

How does IRR relate to NPV?

IRR is the discount rate that makes net present value exactly zero. A positive NPV at a given rate means the IRR is higher than that rate, which is why the calculator also shows the NPV at 10 percent as a cross-check.

Can IRR give misleading results?

Yes. When cash flows switch signs more than once, there can be multiple IRRs, and IRR ignores the scale of the investment. For unconventional cash flows or comparing project sizes, net present value is often the safer measure.

How is the rate computed?

The calculator uses the Newton-Raphson method, an iterative root-finding technique that repeatedly improves a guess until the net present value is essentially zero, then reports the converged rate as a percentage.

IRR Calculator

Initial Investment

Annual Cash Flows

Year 1

Year 2

Year 3

Year 4

Year 5

IRR15.24%

NPV at 10%$13,723.60

The internal rate of return (IRR) is the discount rate that makes the net present value of a project zero, expressing an investment’s annualized return as a single percentage. This calculator takes an upfront investment plus a series of yearly cash flows and solves for that rate using Newton-Raphson iteration. It also reports the net present value at a 10 percent discount rate so you can sanity-check whether the project clears a typical hurdle.

Formula

0 = Σ CFₜ / (1 + IRR)^t, summed from t = 0 to N

CFₜ: Cash flow in period t (period 0 is the negative initial investment)
IRR: Internal rate of return that sets net present value to zero
t: Period index, starting at 0
N: Final period in the cash-flow series

How it works

Enter the initial investment and the cash flows you expect in each subsequent period. The initial investment is treated as a negative outflow at period zero.
The calculator builds the full cash-flow stream and finds the rate where the net present value equals zero, iterating with the Newton-Raphson method until it converges.
It returns the IRR as an annual percentage and also computes the NPV discounted at 10 percent, a quick reference for whether the return beats a common required rate.

Worked example

A $10,000 investment returning $3,000, $4,000, $5,000, and $6,000 over the next four years.

Cash-flow stream: [−10,000, 3,000, 4,000, 5,000, 6,000].
Find the rate r where −10,000 + 3,000/(1+r) + 4,000/(1+r)² + 5,000/(1+r)³ + 6,000/(1+r)⁴ = 0.
Newton-Raphson converges to r ≈ 0.2489, i.e. 24.89%.
For reference, discounting the same flows at 10% gives a positive NPV of about $3,887.71.

IRR is about 24.89%, and the net present value at a 10% discount rate is about $3,887.71.

Frequently asked questions

What does the IRR tell me?: It is the annualized return at which an investment breaks even in present-value terms. If the IRR exceeds your required rate of return, the project is generally worth pursuing; if it is lower, the project destroys value at your hurdle rate.
How does IRR relate to NPV?: IRR is the discount rate that makes net present value exactly zero. A positive NPV at a given rate means the IRR is higher than that rate, which is why the calculator also shows the NPV at 10 percent as a cross-check.
Can IRR give misleading results?: Yes. When cash flows switch signs more than once, there can be multiple IRRs, and IRR ignores the scale of the investment. For unconventional cash flows or comparing project sizes, net present value is often the safer measure.
How is the rate computed?: The calculator uses the Newton-Raphson method, an iterative root-finding technique that repeatedly improves a guess until the net present value is essentially zero, then reports the converged rate as a percentage.

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