IRR Calculator
Calculate Internal Rate of Return, NPV, and investment profitability metrics
IRR Calculator
Calculate Internal Rate of Return, NPV, and investment profitability metrics
Analysis Setup
Cost of capital or required rate of return
Rate for reinvesting positive cash flows (MIRR)
Cash Flows
Enter cash flows for each period (negative for outflows)
IRR
Internal Rate of Return
NPV
Net Present Value
Payback
Payback Period
PI
Profitability Index
Investment Decision Analysis
Summary of key metrics and recommendations
Key Metrics
Investment Decision
NPV Profile
NPV at different discount rates showing IRR intersection
Understanding IRR and Investment Analysis
Internal Rate of Return (IRR) is a crucial metric in investment analysis that represents the discount rate at which the net present value (NPV) of an investment equals zero. It helps investors evaluate and compare the profitability of different investment opportunities.
Key Investment Metrics
- IRR: The effective annual rate of return on an investment
- NPV: The difference between present value of cash inflows and outflows
- Payback Period: Time required to recover the initial investment
- Profitability Index: Ratio of present value of benefits to costs
- MIRR: Modified IRR with realistic reinvestment assumptions
IRR vs Other Methods
- IRR vs NPV: IRR shows percentage return, NPV shows dollar value creation
- IRR vs Payback: IRR considers time value of money, payback doesn't
- IRR vs MIRR: MIRR uses realistic reinvestment rates
IRR Calculation Methods
IRR Formula
NPV = Σ [CFt / (1 + IRR)^t] = 0
Where CFt = cash flow at time t
NPV Formula
NPV = Σ [CFt / (1 + r)^t] - Initial Investment
Where r = discount rate
MIRR Formula
MIRR = (FV_positive / PV_negative)^(1/n) - 1
Uses separate rates for financing and reinvestment
Profitability Index
PI = (NPV + Initial Investment) / Initial Investment
PI > 1 indicates profitable investment
Investment Decision Rules
Acceptance Criteria
- • IRR > Required Return: Accept project
- • NPV > 0: Accept project
- • PI > 1: Accept project
- • Payback < Target: Consider acceptable
- • MIRR > Cost of Capital: Accept project
IRR Limitations
- • Multiple IRRs for non-conventional cash flows
- • Assumes reinvestment at IRR rate
- • Can conflict with NPV for mutually exclusive projects
- • Doesn't consider project scale
- • May not exist for all cash flow patterns
Practical Applications
Business Projects
- • Equipment purchases
- • Facility expansions
- • Technology upgrades
- • Product launches
- • Cost-saving initiatives
Real Estate
- • Rental property investments
- • Fix-and-flip projects
- • Commercial real estate
- • Development projects
- • REIT investments
Financial Investments
- • Stock investments
- • Bond portfolios
- • Private equity
- • Venture capital
- • Mutual funds
Frequently Asked Questions
What's a good IRR for an investment?
A good IRR depends on the risk level and industry. Generally, 10-15% is considered good for low-risk investments, 15-25% for moderate risk, and 25%+ for high-risk investments. Compare to your cost of capital and alternative investments.
When should I use MIRR instead of IRR?
Use MIRR when you have different rates for financing and reinvestment, or when cash flows change sign multiple times. MIRR provides more realistic assumptions about reinvestment rates than IRR.
What if IRR and NPV give different decisions?
NPV is generally preferred for mutually exclusive projects because it measures absolute value creation. IRR can be misleading when comparing projects of different sizes or durations. Use NPV for final decisions.
How do I choose the right discount rate?
Use your cost of capital, required rate of return, or risk-free rate plus risk premium. For personal investments, consider your opportunity cost or expected return from alternative investments with similar risk.
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