Calculate the Internal Rate of Return (IRR) of an investment — enter your initial outlay and projected annual cash flows to find the annualised rate of return.
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Enter your initial investment cost and then list the annual cash flows expected each year (one per line). The IRR is calculated automatically.
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IRR is the annual rate of return that makes the Net Present Value (NPV) of all cash flows from an investment equal to zero. In simpler terms, it is the effective annual return of an investment accounting for the timing and size of all cash flows in and out. It is widely used to compare and rank investment projects.
A good IRR depends on the industry, risk level and cost of capital. As a general guide: below 10% is typically low for equity investments; 15-20% is solid for private equity; 20%+ is excellent for venture capital. For real estate, 8-12% IRR is often considered acceptable. Always compare IRR against your hurdle rate (minimum acceptable return) and against alternative investments.
NPV (Net Present Value) shows the absolute value created by an investment in pounds — a positive NPV means the investment creates value. IRR shows the percentage return. NPV is generally preferred for decision-making because it shows the actual value added. IRR is useful for comparing investments of different sizes. A project can have a high IRR but small NPV if it is small in scale.
IRR has several limitations: it assumes interim cash flows are reinvested at the same IRR rate (often unrealistic); it can produce multiple IRR values for projects with alternating positive and negative cash flows; it does not account for the scale of investment; and it can rank projects incorrectly when mutually exclusive. Modified IRR (MIRR) addresses some of these issues.
The hurdle rate is the minimum acceptable rate of return for an investment — also called the required rate of return or cost of capital. If the IRR exceeds the hurdle rate, the investment is worth pursuing; if not, it destroys value. Companies typically set hurdle rates based on their weighted average cost of capital (WACC) plus a risk premium.
In real estate, IRR accounts for all cash flows: purchase cost (negative outflow), rental income (positive inflows), operating expenses (negative), financing costs, and eventual sale proceeds. A property that costs £200,000, generates £1,200/month net for 5 years, and sells for £260,000 yields an IRR of approximately 10.5% — making it directly comparable to other investment types.
MIRR addresses the reinvestment rate assumption problem of IRR. While IRR assumes interim cash flows are reinvested at the IRR itself, MIRR allows you to specify a reinvestment rate (typically the cost of capital) and a finance rate for negative cash flows. MIRR produces a single, more realistic return figure and is preferred by many financial analysts.
Yes — you can calculate the IRR of a stock investment by entering the purchase price as the initial outflow, annual dividends as positive cash flows, and the eventual sale price as the final cash flow. This gives you the total annualised return including both capital gains and dividend income, allowing direct comparison with bonds, real estate or other investment types.
