Frequently Asked Questions

Assuming you initially invest 10,000 dollars with a 5-year investment period, a 12% IRR is equivalent to achieving a total return of 7,623.42 dollars after 5 years. The overall return rate is 76.23%, regardless of whether your annual returns are high or low. This 12% IRR is compound interest, which is the annualized compound rate of return.

If future cash inflows are less than the amount invested initially, IRR will be negative. For example, if you first spend 1 million but only receive 200,000 a year for next three years, then even if we have a discount factor r = 0, the future cash amount is only 600,000, which is far lower than the first spending of 1 million, so the net present value (NPV) is always negative. Therefore, the IRR should be a negative number: only if it employs a negative discount rate (i.e., discounted less future cash flows, thus higher present value of future cash flows) will the NPV reach zero.

When a project's cash flow sequence changes sign more than once over multiple periods, for example, cash flows switch direction multiple times, such as negative → positive → negative → positive... and so on, i.e., 'intermittent cash flows', IRR will have multiple results. Multiple IRR solutions are generally more common in large projects, such as infrastructure construction projects, nuclear power plant decommissioning costs, demolition and maintenance, or phased reinvestment processes, etc.

IRR and ROI both measure how well investments perform, but they work differently. Return on Investment (ROI) is a basic percentage that divides profit by initial investment. ROI does not consider when money comes in or goes out over time. An IRR calculator finds the Internal Rate of Return (IRR), which is a more detailed measurement. The IRR calculator takes into account when cash flows happen and the changing value of money over time. The IRR calculator shows you the yearly return rate that makes all cash flows equal to zero when looking at present value.

The IRR calculator gives you a percentage that shows the yearly return on your money. A higher number from the IRR calculator usually means a better investment. Compare the IRR to your hurdle rate (minimum acceptable rate of return). If IRR > hurdle rate, the investment is potentially worthwhile. If IRR < hurdle rate, the investment may not meet your return requirements. When comparing multiple investments, higher IRR projects are generally preferable, assuming similar risk profiles.

Yes, IRR can be negative or over 100%. An IRR calculator can show negative results, meaning you will lose money on the investment. An IRR calculator can also show results above 100%, which shows a very profitable investment. You might see this with short-term projects that need small investments but make big returns quickly. You should check high IRR calculator results carefully as they might indicate mistakes in your cash flow numbers or unrealistic plans.

While IRR is a valuable metric, it has several limitations: IRR assumes that all interim cash flows can be reinvested at the same IRR rate, which may be unrealistic. Non-conventional cash flows can result in multiple IRR values or no solution. IRR doesn't account for the absolute size of investments, potentially favoring smaller projects with higher percentage returns but lower absolute profits. IRR may lead to suboptimal decisions when comparing mutually exclusive projects with different durations or investment sizes. Because of these issues, you should use your IRR calculator along with other money tools like NPV, payback time, and profit index for a full picture when analyzing investments.

The Modified Internal Rate of Return (MIRR) fixes some problems with the basic IRR calculator. MIRR uses more realistic ideas about reinvestment rates. MIRR assumes that positive cash flows are reinvested at the firm's cost of capital, not at the IRR itself. MIRR assumes that negative cash flows are financed at the firm's financing cost. MIRR always provides a single solution, even for non-conventional cash flows. MIRR typically yields more conservative and realistic return estimates than IRR. MIRR is often more accurate for real situations than a basic IRR calculator, but many people still use the standard IRR calculator because it is simpler and well-established in financial analysis.