Transparent method
The formula
Worked example
Example inputs
How to interpret the result
IRR accounts for both the size and the timing of cash flows, which is exactly what a simple total-profit comparison misses. Two investments returning the identical total profit can have very different IRRs if one delivers its cash flows earlier and the other backloads them toward the end.
Before you rely on it
What to check
Compare IRR alongside total dollar profit, not instead of it, since IRR can favor a smaller, faster-returning investment over a larger one with more total profit spread across a longer timeline.
The common error
Where people go wrong with IRR calculator
Ranking investments by total profit alone while ignoring when the cash actually arrived. An investment with lower total profit but faster-returning cash flows can carry a higher IRR than the alternative bigger, but slower, payout.
Sensitivity evidence
How initial cash flow changes the estimated IRR
| Initial cash flow | Estimated IRR | Total net cash flow |
|---|---|---|
| $8,000 | 29.4% | $9,500 |
| $9,000 | 24.1% | $8,500 |
| $10,000worked example | 19.7% | $7,500 |
| $11,000 | 15.9% | $6,500 |
| $12,000 | 12.6% | $5,500 |
Every input, tested
Which input moves the estimated IRR most
| Input | Tested from | To | Estimated IRR at each end | Swing |
|---|---|---|---|---|
| Initial cash flow | $9,000 | $11,000 | 24.1% to 15.9% | 8.2% (42%) |
| Year 2 inflow | $2,700 | $3,300 | 18.9% to 20.6% | 1.7% (8.7%) |
| Year 1 inflow | $2,250 | $2,750 | 18.9% to 20.6% | 1.7% (8.6%) |
| Year 3 inflow | $3,150 | $3,850 | 18.9% to 20.5% | 1.7% (8.4%) |
| Year 4 inflow | $3,600 | $4,400 | 18.9% to 20.5% | 1.6% (8.1%) |
| Year 5 inflow | $4,050 | $4,950 | 19.0% to 20.4% | 1.5% (7.6%) |
Two variables at once
Estimated IRR by initial cash flow and year 1 inflow
| Initial cash flow \ Year 1 inflow | $2,000 | $2,500 | $3,000 |
|---|---|---|---|
| $8,000 | 27.2% | 29.4% | 31.7% |
| $9,000 | 22.2% | 24.1% | 26.1% |
| $10,000 | 18.0% | 19.7% | 21.4% |
| $11,000 | 14.4% | 15.9% | 17.5% |
| $12,000 | 11.3% | 12.6% | 14.0% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Initial cash flow | $10,000 |
| Year 1 inflow | $2,500 |
| Year 2 inflow | $3,000 |
| Year 3 inflow | $3,500 |
| Year 4 inflow | $4,000 |
| Year 5 inflow | $4,500 |
| Estimated IRR | 19.7% |
| Total net cash flow | $7,500 |
Where the inputs come from
Initial cash flow is the money you put in at the start, entered as a positive amount here, and each year's inflow is what you receive at the end of that year. Use actual or realistically expected cash, after costs. The tool handles five yearly flows at regular intervals, so a project with irregular dates needs the XIRR calculator. Include a final sale value in the last year's inflow if you plan to sell.
Using the estimated IRR in a real decision
An IRR above the hurdle suggests the project adds value, and one below it does not.
When the result stops applying
IRR assumes each inflow is reinvested at the IRR itself, which is optimistic for very high rates. Projects with cash flows that change sign more than once can have several IRRs or none. Comparing projects of different sizes by IRR alone can mislead, so look at NPV too. The result is only as good as the cash flow forecast.
What to compare it with
Check the answer with the NPV calculator at your hurdle rate, and use MIRR when you want a more conservative reinvestment assumption. For a portfolio with deposits, the money-weighted return page uses the same calculation, and XIRR handles uneven dates. Test a case where the last inflow is 20% lower to see how sensitive the return is.
People also ask
Frequently asked questions
What is a good IRR?
It depends on the risk and your alternatives. An IRR is good if it clearly exceeds the return you could earn elsewhere with similar risk, plus a margin for forecast error.
Why can IRR be misleading?
It assumes reinvestment at the same rate and can give multiple answers when cash flows switch signs. NPV and MIRR help cross-check it.
How is IRR different from ROI?
ROI is total gain divided by cost and ignores timing. IRR is an annual rate that accounts for when each cash flow arrives.