Internal Rate of Return (IRR)

Capital Budgeting

Updated Apr 2026 • Has calculator

The discount rate at which a project's net present value equals zero.

What is IRR?

The internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows from a project equal to zero. In practical terms, it is the annualised return you would earn if the project performs exactly as projected. A project is worthwhile if its IRR exceeds the company's hurdle rate (cost of capital). IRR is popular because it is expressed as a percentage that can be compared directly to the cost of borrowing or other investment benchmarks. However, IRR can give misleading results when cash flow signs change more than once, and it implicitly assumes reinvestment at the IRR itself — a problem that MIRR corrects.

Formula

NPV = 0 → solve for r (Newton-Raphson iteration)

Worked Example

Same 5-year project as the NPV example

Step 1 Initial investment: −$500,000

Step 2 Cash flows: $120K, $150K, $180K, $160K, $130K (years 1–5)

Step 3 Solve: 0 = −500K + 120K/(1+r) + 150K/(1+r)² + 180K/(1+r)³ + 160K/(1+r)⁴ + 130K/(1+r)⁵

Step 4 IRR ≈ 15.78% (Newton-Raphson solution)

Step 5 → IRR (15.78%) exceeds the 10% hurdle rate, so the project should be accepted

Source: CFA Institute — Corporate Finance, 4th ed., Capital Budgeting (2024-01-01)

Calculate IRR

Cash Flows (CF₀, CF₁, CF₂, …)

Enter comma-separated cash flows starting at t=0. Must include at least one negative and one positive value. E.g.: -1000, 300, 400, 500, 200

IRR

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Not investment advice.

How to Interpret IRR

< 5

Below Risk-Free Rate — very weak return

5 – 10

Below Typical Cost of Capital — likely destroys value

10 – 20

Attractive — above typical corporate hurdle rates

> 20

High Return — exceptional project or leveraged investment

📚 Capital Budgeting — Complete the path

Sources