What IRR means
The internal rate of return is the single discount rate at which an investment breaks even — the rate that makes the present value of every future cash flow exactly offset the money you put in. Put another way, it is the annualized rate the project effectively earns on the capital tied up in it.
IRR is useful because it boils an irregular stream of inflows and outflows down to one comparable percentage. The higher the IRR, the more attractive the cash-flow profile, all else equal — and a project clears the bar when its IRR exceeds the return you could earn elsewhere on similar risk.
Entering your cash flows
List the cash flows in time order, one per period, separated by commas or spaces. The first entry is usually your initial outlay and should be negative because money is leaving you; later inflows are positive.
Periods are evenly spaced — typically years — and each value is the net cash for that period. If a period has both money in and money out, enter the net of the two. The IRR you get back is expressed per period, so yearly flows give an annual rate.
Reading the result and the chart
The headline percentage is the rate that zeroes out net present value for the flows you entered. The cash-flow chart plots each period so you can see the shape of the investment at a glance — the early negative bar for your outlay and the positive bars that follow as it returns money.
Compare the IRR against your required return or the cost of the money you are using. If IRR sits comfortably above that hurdle, the timing and size of the inflows are working in your favor.
Caveats and common mistakes
IRR is a powerful summary but it has real limits:
- It needs at least one negative and one positive flow; if every value shares a sign, no rate can zero out NPV.
- When the sign of the flows changes more than once, the equation can have multiple IRRs — or none — and a single number may be misleading.
- IRR is not the same as the return you actually realize; it implicitly assumes interim cash is reinvested at the IRR itself, which rarely holds.
- For comparing projects of different scale or timing, pair IRR with net present value rather than relying on it alone. This tool is for education, not investment advice.
Formula
IRR solves NPV = Σ CFₜ / (1+IRR)^t = 0Frequently asked questions
- Why does it say there is no sign change?
- IRR requires at least one negative and one positive cash flow. If all flows have the same sign, no return rate can make NPV zero.