How to use the IRR calculator
- Select the cash flow frequency (monthly, quarterly, semiannual, or annual)
- Add cash flows: negative values for outflows (investments, expenses) and positive values for inflows (revenue, returns)
- You can paste values directly from a spreadsheet to import multiple cash flows at once
- Click 'Calculate IRR' to see the result
- The calculator will show the periodic IRR and equivalent annual IRR, plus a summary of cash flows
What is IRR (Internal Rate of Return)
The Internal Rate of Return (IRR) is a financial metric that represents the discount rate that makes the net present value (NPV) of a series of cash flows equal to zero. In other words, it's the expected rate of return of an investment or project.
IRR is widely used to evaluate investment feasibility, compare different opportunities, and make financial decisions. The higher the IRR, the more attractive the investment.
IRR is especially useful because it considers the time value of money, recognizing that a dollar today is worth more than a dollar in the future.
How to calculate IRR
IRR is calculated by finding the rate that equates the present value of future cash flows to the initial investment:
IRR formula:
NPV = 0 = CF₀ + CF₁/(1+IRR) + CF₂/(1+IRR)² + ... + CFₙ/(1+IRR)ⁿ
Where CF₀ is the initial investment (usually negative), CF₁ to CFₙ are future cash flows, and IRR is the rate that solves the equation. Our calculator uses the Newton-Raphson method to find this rate numerically.
Cash flows: inflows and outflows
To calculate IRR correctly, you need to identify all cash flows of the investment:
Outflows (negative values)
Represent money leaving your pocket:
- Initial investment (e.g., property purchase, stock investment)
- Costs and expenses (e.g., maintenance, taxes, fees)
- Periodic payments (e.g., loan installments)
Inflows (positive values)
Represent money entering your pocket:
- Periodic revenue (e.g., rent, dividends, profits)
- Sale or redemption value at the end (e.g., property sale, investment redemption)
- Investment returns (e.g., interest received, appreciation)
Cash flow frequency
IRR can be calculated for different frequencies. The calculator automatically converts to equivalent annual rate:
Monthly
Cash flows occur every month. Useful for investments with monthly revenue like rent or installments.
Quarterly
Cash flows occur every 3 months. Common in quarterly financial reports.
Semiannual
Cash flows occur every 6 months. Used in some contracts and medium-term investments.
Annual
Cash flows occur once per year. Ideal for long-term projects and annual analyses.
The calculator always shows the IRR in the selected period and the equivalent annual IRR to facilitate comparisons.
How to interpret the IRR result
The IRR value indicates the investment's profitability:
Positive IRR
Indicates the investment generates returns above the opportunity cost. The higher the positive IRR, the better the investment. Compare with market interest rates or your minimum expected return rate.
Negative IRR
Indicates the investment is not financially viable - cash flows don't compensate for the initial investment. Consider other alternatives or review projected cash flows.
Zero or very close to zero IRR
Indicates the investment only recovers the invested capital, without generating additional returns. May be acceptable if the goal is capital preservation, but not ideal for growth.
Practical example
Let's calculate the IRR of a real estate investment:
Scenario:
- Month 0: Initial investment of R$ 300,000 (outflow)
- Months 1-12: Monthly rent of R$ 2,000 (inflow)
- Month 12: Property sale for R$ 350,000 (inflow)
- Frequency: Monthly
- Total: 13 cash flows (1 initial outflow + 12 rents + 1 sale)
Expected result: Positive monthly IRR (e.g., 0.8% per month) and equivalent annual IRR (e.g., 10% per year)
This means the investment generates an annual return of approximately 10%, considering rents received and property appreciation. Compare this IRR with investment alternatives to make the best decision.
Related tools
Explore other financial calculators that can complement your analysis:
Important notice
This calculator is educational and provides estimates based on the cash flows entered. The actual IRR may vary due to factors such as inflation, unconsidered risks, changes in market conditions, and other external factors. Use results as an analysis tool and consult a financial professional for important decisions.