IRR Calculator: Quickly calculate the internal rate of return on investments. Free, easy-to-use tool for project evaluation and financial planning.
Using the IRR calculator
Using the IRR calculation tool is so easy. First, you input the initial investment amount (in any currency, dollar, euro or Swiss franc). Next, decide how many years of the cash flows you want to measure (anywhere from one year to a maximum of 25 years). Input the amounts for each period, positive cash flow out of the past or future estimate
Ready to go? Click “Calculate”. Our Internal Rate Of Return calculator will then give you the outputs.
- the Internal Rate of Return, a.k.a. discount rate
- the Gross Return in percentages
- The net Cash Flow (Profit – Loss)
What is the Internal Rate of Return?
Internal rate of return (IRR): The discount rate for which the net present value (NPV) of all the cash flows in a project are zero. In economic terms, it is also called “economic rate of return” and “discounted cash flow rate of return” A more straightforward way to look at it is by evaluating prospective investment candidates, where you know this classic wording as “hurdle rate”. Internal here means excluding external costs, i.e., capital, inflation, etc. The law of this is that it weighs more on the earlier cash flows than the later cash flows, capturing investors’ time preferences.
Internal Rate of Return (IRR) approximates the probable revenue a few possible investments may bring. The higher the IRR, the better the project, and vice versa (lower IRR implies higher risk/disadvantages/rejectable project). It is a good tool for benchmarking two or more potential projects about each other.
However, it should be used with metrics such as net present value (NPV) and IRR alone. IRR should not be used to compare projects with very different timeframes because it can be misleading. The IRR also does not factor in the reinvestment rates of profits, which can skew the actual cost of capital. Common replacement: Modified Internal Rate of Return (MIRR)
IRR formula
The Internal Rate of Return (IRR) on your own or by formulas inside an Excel spreadsheet is one that you may be shocked to discover that it is not as simple to analyze as it is.
If there is an analytical solution, it is not simple to programmatically or use something like our IRR calculator you will the only way. The calculation relies on the Net Present Value (NPV) equation :
Somewhere, *r* is in the discount or interest rate, and T = number of cash flow periods t where period *t. *C0* is the initial investment; *Ct* is a cash outlay during period *t*. Looking for *r* means setting the NPV equal to zero and solving the equation. Unfortunately, *r* cannot be isolated analytically. This is why our calculator uses a recursive method and aims to get *r* where the NPV is near 0; such an r only exists at the limit.
Remember, this formula is to be used only for periodic payments. So, all cash flows should be at regular intervals — yearly, quarterly or monthly. For irregular (non-periodic) cash flows, use our XIRR calculator instead.
IRR calculation example
Below, we will walk through one investment example: The Project needs an initial outlay of $10,000 and produces $15,000 at the end of three years with cash flows of $3,800, $4,400 & $6,800 per year, respectively. When calculating the internal rate of return (IRR), this discount rate would equal the net present value (NPV) zero. The brute force solution for this problem would be to qualitatively figure out the connection between future and present value (the cost of capital) by examining certain cases graphically.
The graph shows that when the discount rate ranges from 20% to a bit more than 21%, the Net Present Value (NPV) turns positive to negative. After that, we narrow in on the internal rate of return (IRR) day-by-day by trying multiple discount rates in this vicinity to get a present value that is very, very close to zero, let’s say, zero per cent.
This IRR pictorial, though, helps more conceptually to visualize what IRR is. However, it is best to compute it automatically using some of the top software solutions available.
Financial caution
We should be careful here with finances. While this simple online calculator is a handy starting point for estimating the internal rate of return on investment, never stop there thinking like that. You should consult an expert in your field or a full-time money adviser when making major financial decisions and long-term deals like constrained deposits from banks. Use with caution the thoughts software provides and suffer the consequences.