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Calculate the internal rate of return (IRR) for any investment. Find the discount rate that makes NPV zero and compare against your hurdle rate.
IRR is the annualized discount rate at which an investment's net present value (NPV) equals zero. It represents the expected compound annual growth rate and is widely used to compare the profitability of capital investments.
| Discount Rate | NPV |
|---|---|
| 5.00% | $14,162.82 |
| 10.00% | $1,137.22 |
| 10.48%(IRR) | $0.00 |
| 15.00% | -$9,693.36 |
| 20.00% | -$18,788.58 |
| 25.00% | -$26,496.00 |
NPV is positive below IRR and negative above it.
Tip: Common hurdle rates range from 8-15% depending on risk. Use IRR alongside NPV for comprehensive analysis, as IRR has limitations with non-conventional cash flows.
| Metric | Best For |
|---|---|
| IRR | Comparing returns across investments |
| NPV | Absolute value created in dollars |
| Payback | Time to recover investment |
| ROI | Simple total return percentage |
Formula
Solve for r where: 0 = āCā + Ī£ [CFā Ć· (1 + r)įµ]r (IRR) = the discount rate that makes NPV exactly equal to zero
Cā = initial investment at time zero
CFā = expected cash flow in period t
Worked Example
$100,000 investment, returns of $25K / $30K / $35K / $40K over 4 years
Did you know? IRR is solved iteratively ā there's no closed-form algebraic solution. The Newton-Raphson method typically converges in under 20 iterations. Excel's IRR() function uses a similar approach with a default guess of 10%.
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