Question 1

What is IRR in simple terms?

Accepted Answer

IRR is the effective annual return your invested money earns given the timing and size of its cash flows. Technically, it is the discount rate that makes the NPV exactly zero. An IRR of 15% means the project performs like an account paying 15% per year.

Question 2

What is a good IRR?

Accepted Answer

Compare IRR to your cost of capital or alternatives: public equities average ~10%, so private projects with more risk typically target 15–25%+. Real estate investors often look for 12–20% levered IRR. Accept projects whose IRR clears your hurdle rate.

Question 3

How is IRR calculated?

Accepted Answer

IRR has no closed-form formula — it is found numerically by solving NPV = 0. This calculator uses a bisection method: it brackets the rate where the NPV changes sign and narrows in until the answer converges. Spreadsheets' IRR() function does the same job.

Question 4

What are the limitations of IRR?

Accepted Answer

IRR assumes interim cash flows are reinvested at the IRR itself (often unrealistic), can produce multiple answers when cash flows change sign more than once, and ignores project scale — a tiny project can post a huge IRR yet create little value. Cross-check with NPV.

📐 IRR Calculator

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