How it works
The internal rate of return is the discount rate at which a project's net present value equals zero. It is the annual return the investment is expected to earn, given the timing of its cash flows.
If the IRR is higher than your hurdle rate (your cost of capital or minimum acceptable return) the project clears the bar. The NPV at the hurdle rate is shown alongside for comparison.
IRR assumes interim cash flows are reinvested at the IRR itself, which can flatter high-IRR projects. When choosing between mutually exclusive projects, prefer NPV.
Formula
Solve for r in: 0 = Σ Cₜ ÷ (1 + r)ᵗ for t = 0 to n.
Questions people ask
What is a good IRR?
Any IRR above your cost of capital adds value. Companies often set hurdle rates of 10–15%; venture and private equity investors typically target 20% or more because of higher risk.
Why can there be more than one IRR?
When cash flows switch between negative and positive more than once (for example, a large cleanup cost at the end), the NPV equation can have several solutions. In that case use NPV or modified IRR.
How is IRR different from ROI?
ROI is total gain divided by cost and ignores timing. IRR accounts for when each cash flow happens, so money returned sooner produces a higher IRR.