IRR Calculator

What the IRR number tells you

IRR stands for internal rate of return. It answers one question: if I put money into this project, what yearly return does it pay me until the money comes back? The answer is expressed as a single annual percentage, which makes it easy to line up projects of different sizes and lengths side by side.

The word internal matters. The rate is computed from the project's own cash flows, nothing outside them. You do not have to pick a discount rate or guess what the market will do. The calculator finds the rate at which the money you put in exactly balances the money you get back, once timing is counted. That balance point is the IRR.

Here is the practical meaning. A 15% IRR means the project compounds your money at 15% per year while it runs. A bank CD paying 4% compounds at 4%. So the project beats the CD by a wide margin, and if your alternative use of cash earns less than 15%, the project wins the comparison. As the SEC's investor education site explains in its internal rate of return glossary entry, the figure is widely used to judge whether an investment clears its hurdle.

The formula, in plain English

Every cash flow gets discounted back to today. A dollar arriving in year 3 is worth less than a dollar today, because you could have invested that dollar for three years. The discount factor for year n is 1 divided by (1 + r) to the power n, where r is the rate we are hunting for.

The net present value, or NPV, adds up all of those discounted flows: the initial investment enters as a negative number and every payback enters as a positive one. IRR is the value of r that makes the whole sum equal exactly zero.

Nobody solves that equation by hand. The rate sits inside an exponent, so there is no neat algebra for it. What calculators do instead is a bracketing search: try one rate, see whether NPV lands positive or negative, and tighten the bracket until the answer stops moving. The search below runs about 200 rounds, which pins the rate down to a tenth of a basis point.

One detail worth knowing: the result depends on treating a year as the period between flows. If your cash arrives monthly, the per-month rate comes out first and gets compounded up to an annual figure, which the last section of this page walks through.

Worked example: $10,000 in, $3,000 a year for five years

Say you buy a used piece of vending equipment for $10,000. It nets $3,000 a year in profit for five years, after which it is worn out and worth nothing. What return did that money earn?

• Cash out on day one: $10,000.
• Cash in at the end of each of years 1 through 5: $3,000, so $15,000 in total.
• Simple ROI: $15,000 minus $10,000 is $5,000 of profit, which is 50% of what you put in.
• But 50% ignores the wait. The IRR that makes the five discounted payments equal $10,000 comes out to 15.24% per year.

Now compare two ways to get the same 50% ROI. Option A is the machine above, which ties your money up for five years. Option B is a flip that returns $15,000 on $10,000 in a single year. Both show 50% ROI, yet Option B compounds at roughly 50% per year while Option A manages 15.24%. The IRR exposes that difference; the ROI hides it.

The same math works in reverse. A payday loan that charges $15 to bridge $100 for two weeks carries an APR of about 391%, and annualized rates are exactly what IRR-style math produces. Rates that look small per period turn huge once the clock is applied honestly.

IRR vs. ROI vs. CAGR: which number to use

Three numbers describe returns, and each one answers a different question. ROI measures total profit against what you put in, with no clock. CAGR measures steady growth of one sum over time, which fits a buy-and-hold that pays nothing along the way. IRR handles money moving in and out at different dates, which fits projects, rentals, renovations and private deals.

A rental property is the classic IRR case. Cash enters monthly as rent, leaves as repairs, and a big lump arrives when you sell. CAGR cannot describe that pattern at all, and ROI says nothing about whether the money was tied up for three years or fifteen. IRR compresses the whole messy schedule into one annual rate.

Use ROI when someone asks how much you made, CAGR when you held one asset untouched, and IRR whenever money moved in and out more than once. If a deal is pitched to you with only an ROI figure and a long timeline, ask for the IRR, because that is where the timing cost shows up.

What counts as a good IRR?

There is no universal good number, because the right benchmark depends on what your cash could earn somewhere else and how much risk the project carries. Still, some rough bands help you sanity-check a deal before you dig deeper.

• Below 5%: weak for a risky project. Treasury bills can sit in that neighborhood without any of the work or risk.
• 5% to 10%: reasonable for low-risk setups, but thin if the project demands your time or carries default risk.
• 10% to 15%: solid. Long-run stock market returns have historically landed near the bottom of this band, so a project here is paying you for the extra effort.
• Above 15%: strong, provided the cash flows are real. The first reaction to a 40% IRR should be to check the assumptions, not to celebrate.

The right question is not whether the IRR is high in the abstract but whether it clears your personal hurdle. If your money otherwise earns 4.5% in a high-yield savings account, a 9% IRR doubles that. If you are comparing against a business you could grow at 20%, then 9% is a pass. The IRS notes in Publication 550 on investment income and expenses that investment returns and their tax treatment vary widely by vehicle, so the after-tax hurdle is the one that counts.

Where IRR can mislead you

IRR is a useful number with known blind spots, and it pays to learn them before betting on a deal.

Scale is invisible. A project that turns $100 into $150 in a year has a 50% IRR. A project that turns $100,000 into $120,000 in a year has a 20% IRR but hands you twenty times the dollars. Chasing the highest rate rather than the highest profit is a classic mistake when the two projects cannot both be scaled up.

Reinvestment is assumed. The math quietly assumes each early cash flow gets reinvested at the IRR itself. If a project shows 30% and pays you in year 1, the calculation presumes you find another 30% home for that money. In real life the reinvestment rate is usually lower, which flatters projects that pay early.

Mixed signs can produce multiple answers. When cash flows swing from negative to positive and back again (a project that needs a mid-life overhaul, say), the equation can have two or more valid solutions, and neither is more correct than the other. The calculator reports the first rate it brackets; treat oddball flow patterns as estimates.

No solution is possible. If the flows never add up to more than you put in, there is no positive rate that balances the books. The calculator will tell you when no positive IRR exists, which is itself useful information: the project cannot pay you back.

Monthly cash flows: annualizing the rate

Many real deals pay monthly, not yearly. A vending route, a car wash, a rental: the money shows up twelve times a year. The clean way to handle that is to solve for a monthly rate first, then compound it up: annual rate = (1 + monthly rate) to the 12th power, minus 1.

Worked example. You buy a coin-operated machine for $24,000. It clears $600 a month for 48 months, after which it is done. Total in: $28,800, an ROI of 20%. The monthly IRR works out to 0.77%, and compounding gives 9.64% per year.

Was that a good use of $24,000? Park the same money at 8% compounded annually for four years and it grows to about $32,652, a gain of $8,652 without lifting a finger. The machine earned $4,800. On pure numbers, the savings account won, and the IRR comparison makes that visible in seconds.

When you use the calculator below with monthly numbers, either divide your monthly flow by the number of months in your compounding year and switch the period to months, or convert your flows to a yearly equivalent and keep the period in years. Just be consistent: the annualization formula assumes the rate you solve for matches the spacing of the flows you enter.