Published 2025-12-25 · Last updated 2026-01-24 · Reviewed by Valzura Editorial Team
IRR Calculator
Measure the annualized return an investment or acquisition actually earns.
The internal rate of return (IRR) is the annualized rate at which an investment's cash flows, including the initial outlay, have a net present value of exactly zero. It captures both the size and the timing of every cash flow in a single percentage, which makes it the standard way to compare investments of different shapes and lengths. An investment is attractive when its internal rate of return exceeds your cost of capital or required hurdle rate.
Cash paid out at the start (year 0), such as the purchase price.
Added to the final year's cash flow, such as a resale of the business.
Yearly cash flows
Cash received at the end of each year. Add up to 10 years.
Internal Rate of Return
15.2%
The annualized return over 5 years of cash flows.
How the IRR equation is solved
Here C₀ is the initial investment and CF₁ through CFₙ are the cash flows received at the end of each year. There is no algebraic way to isolate the rate, so the equation has to be solved numerically: this calculator narrows in on the answer by repeatedly testing rates until the net present value of the whole series lands at zero. The result is the single rate that makes the deal a mathematical wash, which is why comparing it against your discount rate tells you whether the investment clears your bar.
A worked example: buying a cash-flowing business
Suppose you invest 100,000 dollars in a small business and it returns 30,000 dollars of cash at the end of each year for five years. You collect 150,000 dollars in total, a 1.5 times multiple on invested capital and a 50 percent total gain. The internal rate of return works out to about 15.2 percent per year, noticeably less than 50 percent divided by 5, because each year's cash arrives later and the balance at work shrinks as money comes back.
Timing is the whole point of the measure. If the same 150,000 dollars arrived front-loaded, with bigger checks in the first two years, the rate would be higher; if it arrived as a single payment in year five, it would be lower. Two deals with identical totals can have very different annualized returns.
IRR versus net present value
The two measures are mirror images built from the same math. Net present value fixes the discount rate and reports the dollars of value created; the internal rate of return fixes the value at zero and reports the rate. A rate is easier to compare across deals of different sizes, but it can mislead when cash flows change sign more than once or when projects differ wildly in scale. When the ranking matters, run the same cash flows through the net present value calculator and check that both measures agree.
IRR, CAGR, and simple return on investment
Simple return on investment ignores time entirely: a 50 percent gain scores the same whether it took two years or ten. A compound growth rate fixes that, but it only handles a single starting value and a single ending value. The internal rate of return generalizes both, absorbing any pattern of money in and money out along the way. When an investment has exactly one outlay and one payout, this tool and the compound annual growth rate calculator will produce the same answer.
What IRR means when you buy or sell a business
Sophisticated buyers work backward from a target return. A search fund or individual acquirer who wants 25 percent per year will model the business's cash flows, add an assumed resale, and then solve for the maximum price that still hits the target. Every dollar of purchase price they save raises their return, which is exactly why sellers who anchor the negotiation with a defensible number do better. You can model the buyer's side with the discounted cash flow valuation tool, and see what your own company would command with the free business valuation calculator.
Frequently Asked Questions
What is a good IRR for buying a business?
Private buyers of small businesses typically target an internal rate of return of 20 to 30 percent or more, well above public stock market returns, to compensate for illiquidity, key-person risk, and the work involved. Private equity funds often underwrite deals to a 20 to 25 percent gross return. The right hurdle depends on how risky the specific business is.
What is the difference between IRR and ROI?
Return on investment measures the total gain relative to the amount invested, ignoring time. The internal rate of return annualizes that gain, so a 50 percent total return looks very different over two years versus ten. IRR is the better comparison tool when investments have different holding periods or cash flow timing.
Why does IRR sometimes give strange or multiple answers?
The IRR equation can have more than one mathematical solution when cash flows change sign more than once, for example an investment that requires a second cash injection later on. In those cases, net present value at your actual discount rate is the more reliable measure. This calculator solves for a single rate and works best with one initial outlay followed by returns.
How is IRR different from CAGR?
Compound annual growth rate measures the smooth growth rate between a single beginning value and a single ending value. The internal rate of return handles many cash flows in and out over time. When there is just one investment and one final payout, the two measures produce the same number.
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