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The Internal Rate of Return (IRR) is the discount rate making an investment's NPV equal zero — the annualised effective return. Compare to your hurdle rate to decide whether to invest.
Formula
Solve for IRR where: 0 = Σ [Cₜ / (1+IRR)ᵗ] − C₀; IRR is the discount rate making NPV = 0
- C₀
- Initial investment (outflow) (Currency)
- Cₜ
- Cash flow in period t (Currency)
- IRR
- Internal rate of return (Annual percentage)
Guida passo passo
- 1Solve: 0 = Σ Cₜ/(1+IRR)ᵗ — iterative calculation
- 2IRR > hurdle rate → accept investment
- 3Multiple sign changes in cash flows can give multiple IRRs
- 4Useful for comparing investments of different sizes
Esempi risolti
Ingresso
−$10k initial; $3k, $4k, $5k, $6k over 4 years
Risultato
IRR ≈ 22.8%
Domande frequenti
How is IRR different from ROI?
IRR is annualized and accounts for timing. ROI is total return. On a 2-year investment, IRR tells you equivalent annual return; useful for comparing to other opportunities.
Can there be multiple IRRs?
Yes, if cash flows change signs multiple times (e.g., invest, payback, then invest again). Use NPV and hurdle rate to break ties; IRR alone is ambiguous.
What hurdle rate should I use?
Your cost of capital. Typical 10–15% for equity investments, 5–8% for real estate, 2–3% for bonds. If IRR > hurdle, project is accretive.
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