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IRR Calculator

Determine the annualized break-even return rate where the net present value of cash flows equals zero.

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Upfront capital spent on the investment

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Minimum acceptable rate of return (e.g. WACC)

Projected Annual Inflows
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Hurdle Comparison

If IRR > Hurdle Rate, the investment generates returns above capital costs and should be approved.

Results

Internal Rate of Return (IRR)
24.89%
Target Hurdle Rate (WACC)12.00%
Hurdle Rate Spread+12.89%
NPV at Hurdle Rate (12%)₹32,394
Total Undiscounted Inflows₹1,80,000
Net Undiscounted Profit₹80,000

IRR solves for the discount rate r where: −CF0 + ∑ [CFt ÷ (1 + r)t] = 0.

Internal Rate of Return (IRR) Mechanics

The Internal Rate of Return is the discount rate that equates the net present value of all cash flows to zero:

0 = −CF0 + [CF1 ÷ (1 + IRR)1] + [CF2 ÷ (1 + IRR)2] + ... + [CFn ÷ (1 + IRR)n]

Where:
• CF0 = Upfront capital expenditure
• CFt = Net positive cash inflow in year t
• IRR = Annualized internal discount rate
• Decision Rule = Accept project if IRR > Hurdle Rate (Cost of Capital)

Worked Example: Commercial Fleet Acquisition

A delivery logistics firm invests ₹1,00,000 in a regional fleet route. Over 4 years, the route generates annual net cash inflows of ₹30,000, ₹40,000, ₹50,000, and ₹60,000. The firm's corporate hurdle rate is 12%:

  • Initial Capital Outflow (Year 0): −₹1,00,000
  • Total Undiscounted Inflows: ₹30,000 + ₹40,000 + ₹50,000 + ₹60,000 = ₹1,80,000
  • Solved IRR: 24.89% (annualized compound return)
  • Hurdle Comparison: 24.89% vs 12.00% (+12.89% positive excess spread)
  • NPV at 12% Cost of Capital: ₹33,838

Because the project's IRR of 24.89% exceeds the 12% cost of borrowing by nearly 13 percentage points, the project delivers exceptional risk-adjusted value and should be approved.

Key Assumptions and Limitations

• Reinvestment Rate Trap: Assumes intermediate cash inflows are reinvested throughout the term at the IRR rate (24.89%), which is often unrealistically high compared to general market yields.

• Scale Insensitivity: IRR is a percentage metric that does not account for the absolute dollar size of investment projects.

• Multiple Sign Changes: Projects with alternating cash flow directions (e.g. environmental restoration at decommissioning) may yield multiple or complex IRRs.

• Equal Timing Intervals: Assumes uniform annual cash flow intervals.

Facing a ranking conflict between NPV and IRR?Discover why high-percentage projects can destroy shareholder value and learn how to find the crossover discount rate in our guide: NPV vs. IRR: How to Resolve Conflicting Signals in Capital Budgeting.

Frequently asked questions

What is Internal Rate of Return (IRR)?
IRR is the annualized discount rate that makes the Net Present Value (NPV) of all projected project cash flows (outflows and inflows) equal to zero.
How do I decide whether to accept an investment using IRR?
Compare the calculated IRR with your required hurdle rate or Weighted Average Cost of Capital (WACC). If IRR exceeds the hurdle rate, the investment is expected to generate excess returns and should be accepted.
Why does IRR require both negative and positive cash flows?
Mathematically, to solve for an interest rate where discounted inflows match the initial outlay (NPV = 0), there must be at least one capital outflow (negative) and at least one positive return inflow.
What is the primary limitation of IRR?
IRR implicitly assumes that all future cash flows can be reinvested at the project's IRR rate, which is often unrealistically high for exceptionally profitable projects. In contrast, NPV assumes reinvestment at the more realistic cost of capital.
Can an investment project have multiple IRRs?
Yes. When cash flows change signs multiple times (e.g. negative initial outlay, positive intermediate inflows, and negative decommissioning costs in later years), Descartes' Rule of Signs indicates there can be multiple mathematical internal rates of return.

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Internal Rate of Return (IRR)

24.89%