What is Internal Rate of Return | IRR
Internal Rate of Return (IRR) is a financial metric used to estimate the profitability of an investment or project. It tells you the annual rate of return that would make the net present value (NPV) of all future cash flows equal zero.
It considers the Discount Rate which is the interest rate (or required rate of return) used to convert future cash flows into today’s value.
📈 IRR is the interest rate at which your investment "breaks even" in today's dollars — and anything above that is profit!
How to calculate internal rate of return with examples 🔢:
There isn’t a simple, one-line IRR formula like for ROI or CAGR, because it requires solving this equation:
NPV = ∑t=0n Ct / (1 + r)^t = 0
Where:
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Ct = cash flow in year t
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t = year (0, 1, 2, …)
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r = discount rate
The higher the discount rate:
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The less valuable future cash flows are
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The lower the NPV becomes
Real-Life Internal Rate of Return Example
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Business Project:
A company wants to invest $100,000 in a new product. If the IRR is 15% and the company's minimum required return is 10%, they move forward. -
Real Estate:
A rental property investor uses IRR to estimate if a property will generate enough return after all expenses and over time.
What Is a Good Internal Rate of Return (IRR)?
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Above 10% = often considered solid for low-risk investments
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15–25% = very attractive for startups, real estate, or growth projects
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Compare IRR to your “hurdle rate” — the minimum return you need
Why is Internal Rate of Return Important?
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It shows the annual return of an investment, based on expected cash flows.
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Helps compare different projects or opportunities.
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Commonly used in real estate, startups, and business expansion decisions.
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A project is considered good if IRR > required rate of return (or cost of capital).