How to use this calculator
- Type your Cash flows (year 0, 1, 2…) separated by commas. The first value is today (year 0) and is usually negative, because it is the money you put in.
- Add the later yearly inflows as positive numbers and any extra outlays as negative ones.
- Set the Reinvestment rate (for MIRR): the return you expect on cash you receive before the end.
- Read the Internal rate of return, then compare it with the Modified IRR (MIRR) and the Simple payback row.
What the internal rate of return means
The IRR is the single yearly rate that makes the present value of all your cash flows add up to exactly zero. Put differently, it is the discount rate at which the investment neither gains nor loses value. If your IRR is higher than the return you could get elsewhere at similar risk, the project beats the alternative.
0 = CF₀ + CF₁/(1 + r) + CF₂/(1 + r)² + … + CFₙ/(1 + r)ⁿ- CFₜ = cash flow in year t (negative = money out, positive = money in)
- r = the internal rate of return, per year
- n = the last year in your list
There is no closed-form answer for more than two cash flows, so the calculator finds the rate by repeated trial until the sum reaches zero.
Example: four years of rising income
You invest $10,000 today and receive $2,500, $3,000, $3,500 and $4,000 over the next four years. The calculator returns an IRR of 10.48% a year, with total net cash flow of $3,000 and a simple payback of about 3.25 years.
Now compare a different shape: $10,000 in and a single $16,000 payment after five years gives an IRR of 9.86%, even though it earns $6,000 in total, twice the profit of the first example. The first project returns cash earlier, which is exactly what IRR rewards. For a plain start-to-end growth rate, the CAGR calculator is simpler.
IRR versus MIRR
Plain IRR quietly assumes every inflow is reinvested at the IRR itself. That is optimistic for a project that returns 18% a year. Take cash flows of -$10,000, $8,000, $3,000, $1,000 and $1,000: the IRR is 18.46%, but with a 6% reinvestment rate the MIRR is only 10.59%.
The MIRR compounds all inflows forward at your reinvestment rate and discounts outflows back at the same rate, so it is a more cautious number. When the two are far apart, trust the lower one for planning.
How to use the result
Compare the IRR with your hurdle rate: the return you require given the risk, or the rate on your next best option. To see the same project in dollars, discount the flows with the NPV calculator. To judge how quickly you get your money back, use the payback period calculator.
IRR ranks projects badly when they differ in size or timing. A small project with a high IRR can create fewer dollars than a large one with a lower IRR, so look at net cash flow and NPV too.
Common mistakes
- Leaving out the up-front cost, or entering it as a positive number. The list needs at least one negative and one positive value.
- Mixing periods. Each value is one year; convert monthly flows to yearly totals first.
- Ignoring taxes and fees, which lower every inflow.
- Treating a high IRR on a short project as a permanent return. You still have to find a place for the money afterwards.
Assumptions and limits
Cash flows are assumed to arrive at the end of each year at equal intervals. Flows that change sign several times can produce more than one valid IRR, and the tool reports one of them. It does not model taxes, inflation or risk. Use the figure as a comparison aid and check big decisions with a qualified adviser.
Frequently asked questions
What is a good IRR?
One that exceeds your required return for the risk involved, such as the return on an alternative investment or your cost of borrowing. There is no universal number.
Can IRR be negative?
Yes. If the total of your inflows is less than what you put in, the IRR is below zero.
Why does the calculator say IRR needs both negative and positive flows?
Without money going out and money coming back there is no rate that balances them, so the IRR does not exist.
Is IRR the same as ROI?
No. ROI is total gain divided by cost and ignores timing. IRR is an annualized rate that accounts for when each cash flow happens.
What reinvestment rate should I use for MIRR?
Use a realistic rate you could earn on spare cash, such as a savings or bond yield, rather than the IRR itself.