How to Calculate I R R
What is I R R?
Internal Rate of Return (IRR) is discount rate equating investment cost to present value of future cash flows; alternative to NPV.
Formula
Solve for discount rate where NPV = 0
- NPV
- 0 — 0
Step-by-Step Guide
- 1Input initial investment and projected cash flows
- 2Solve for discount rate where NPV = 0
- 3Compare IRR to required return
Worked Examples
Input
Invest $100k, receive $30k/year for 5 years
Result
IRR ≈ 4.3% (modest return)
Accept if > required return
Common Mistakes to Avoid
- ✕Multiple IRRs (non-standard cash flows)
- ✕Assuming reinvestment at IRR rate
Frequently Asked Questions
IRR vs. NPV?
NPV better for comparing mutually exclusive projects; IRR useful for single projects.
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