How to use the IRR calculator
- Enter the initial investment as a positive number (it is treated as an outflow).
- Enter the cash flow you receive in each of the next five years.
- Read the IRR — the rate that makes the net present value zero.
Worked example
Invest $10,000 and receive $2,500, $3,000, $3,500, $4,000 and $4,500 over five years. The inflows total $17,500, a $7,500 profit, and the IRR is about 23.4% — the annualized return that exactly repays the outlay.
The idea behind IRR
NPV = -Investment + sum( Flow_t / (1 + r)^t )
IRR = the r that makes NPV = 0
IRR is the discount rate that turns a stream of cash flows into a net present value of exactly zero, so it summarizes an uneven, multi-year investment as one comparable annual rate. The calculator solves for it by searching between -90 percent and 1000 percent. When the cash flows change sign more than once (money goes out and comes back in repeatedly), there can be several valid IRRs, and in those cases NPV or a modified IRR is the safer comparison.