Internal Rate of Return (IRR)

What is Internal Rate of Return (IRR)?

Internal Rate of Return (IRR) is a financial metric used to estimate the annualized rate of return on an investment. More precisely, IRR is the discount rate at which the net present value (NPV) of all cash flows (both incoming and outgoing) from an investment equals zero.

IRR is widely used to evaluate and compare different investment opportunities. By expressing the return as a single annualized percentage, it allows investors to compare investments with different sizes, durations, and cash flow patterns on a consistent basis. This makes IRR one of the most important metrics in corporate finance, real estate investing, and portfolio management.

When the IRR of a potential investment exceeds the investor's required rate of return (also called the hurdle rate), the investment is generally considered attractive. The higher the IRR relative to the cost of capital, the more value the investment creates.

IRR Calculator

Calculate the IRR for a simple investment (lump sum in, lump sum out):

IRR Calculator

Frequently Asked Questions

What is the difference between IRR and ROI?
ROI (Return on Investment) measures the total percentage gain or loss of an investment relative to its cost, without accounting for time. IRR accounts for the timing of cash flows and expresses the return as an annualized rate, making it more useful for comparing investments of different durations.
What is considered a good IRR?
A good IRR depends on the type of investment and its risk level. For stock investments, an IRR above 10-12% is generally considered strong. Private equity and venture capital often target IRRs of 15-25% or higher to compensate for illiquidity and higher risk.
How is IRR different from CAGR?
CAGR (Compound Annual Growth Rate) measures the smoothed annual growth rate of an investment from start to finish, assuming all returns are reinvested. IRR accounts for multiple cash flows at different times (deposits, withdrawals, dividends) and finds the rate at which their net present value equals zero.
Can IRR be negative?
Yes, a negative IRR means the investment is expected to lose money. This happens when the total cash outflows exceed the total cash inflows, resulting in a net loss for the investor.
How to calculate IRR in Excel?
Use =IRR(values) for regular cash flows or =XIRR(values, dates) for irregular cash flows. For example: A1=-10000, A2=3000, A3=3000, A4=3000, A5=3000, A6=3000. Then =IRR(A1:A6) returns 15.2%. XIRR is preferred because it handles actual dates rather than assuming equal periods.
What is the difference between IRR and XIRR?
IRR assumes cash flows occur at equal intervals (monthly, annually). XIRR takes actual dates for each cash flow, making it more accurate for real-world investments where deposits, dividends, and withdrawals happen on irregular dates. XIRR is the preferred method for portfolio performance measurement.
Romain Simon
Written by Romain Simon

Founder of Beanvest. Self-directed investor since 2015, building tools to help individual investors make better decisions.

Last updated: March 24, 2026| Editorial process
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