Question 1

What is the Internal Rate of Return (IRR)?

Accepted Answer

IRR is the annualized effective compounded return rate that makes the Net Present Value (NPV) of all cash flows (both positive and negative) from a particular investment equal to zero. In simpler terms, it's the annual growth rate an investment is expected to generate.

Question 2

How is IRR different from ROI (Return on Investment)?

Accepted Answer

ROI only calculates total growth from start to finish. If you make $50 on a $100 investment, your ROI is 50%. However, IRR takes the time value of money into account. Making that $50 in 1 year yields a massive IRR, while making that $50 over 10 years yields a tiny IRR. IRR tells you your annualized pace.

Question 3

Why do I need an initial negative cash flow?

Accepted Answer

To calculate a return, there must first be an investment! Year 0 represents the money you spent to start the project (e.g., buying a rental property or funding a startup). Subsequent years represent the cash coming back to you. Without an initial negative outflow, the math equation for IRR has no starting point!

Question 4

What is a 'good' IRR?

Accepted Answer

A 'good' IRR depends heavily on the cost of capital and the risk of the investment. A 10% IRR might be excellent for a safe municipal bond, but terrible for a high-risk venture capital startup. Generally, an investment's IRR must be higher than the company's Weighted Average Cost of Capital (WACC) to be approved.

Question 5

Why does the calculator say 'Mathematical Error' or fail to converge?

Accepted Answer

IRR equations are solved using complex estimation formulas (like the Newton-Raphson method). If cash flows alternate between positive and negative wildly over many years, the equation can actually have multiple valid IRRs (or none at all). If the cash flows are too erratic, the math simply fails to converge on a single answer.

Question 6

Can I use this for real estate?

Accepted Answer

Absolutely. Real estate investors use IRR extensively. Set Year 0 as your down payment and closing costs (negative). Set Years 1-4 as your annual net rental income (positive). Set Year 5 as your final year's rental income PLUS the net proceeds from selling the house (positive).

IRR Calculator

Internal Rate of Return

Why Use IRR Over Basic ROI?

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