Internal Rate of Return (IRR) and Net Present Value (NPV) Calculator

What are IRR and NPV?

Both measure whether an investment is worth making by comparing money paid out today with money received later. Net present value (NPV) discounts every future cash flow back to today at your required return and subtracts the initial investment. A positive NPV means the investment earns more than that required return; a negative one means it earns less. Internal rate of return (IRR) turns the question around: it is the discount rate at which NPV is exactly zero, in other words the annual return the investment itself delivers.

When do you use it?

Companies use NPV and IRR to choose between projects: a new factory, a product launch, a software system. In valuation, a DCF is really an NPV calculation. In private equity, IRR is the headline performance measure of every deal and every fund. In M&A, a buyer can treat an acquisition as an investment and check its IRR against its cost of capital.

How to read the output

Load the example: an investment of 100, followed by cash flows of 10, 20, 30, 40 and 120 over five years. The IRR is 22.2%. At a 10% discount rate the NPV is about 50, so the investment creates roughly 50 of value on top of earning 10% a year. Total cash received (220) divided by total cash invested (100) gives the multiple of 2.2x.

The decision rule is simple: if IRR is above your required return, NPV is positive and the investment adds value. If IRR is below it, NPV is negative. When two projects compete, NPV tells you which one adds more money; IRR tells you which one earns the higher rate, and the two can disagree for projects of different sizes.

The sensitivity table shows NPV at your discount rate and at one and two points either side. In the example, NPV falls from about 61 at 8% to about 40 at 12%. Every cell stays positive because they are all below the 22.2% IRR, the point where NPV would hit zero.

Common mistakes

• Entering the investment as a negative number. Type it as a positive amount; the calculator treats it as money paid out.
• Forgetting the exit value. Final sale proceeds belong in the year-5 cash flow, or the IRR will look far too low.
• Choosing projects on IRR alone. A small project with a high IRR can create less value than a large one with a lower IRR.
• Mixing nominal and real figures. If cash flows include inflation, the discount rate must too.

Limitations

The model takes one investment at the start and five yearly cash flows, all at year end. It does not handle monthly timing, irregular dates or more than five years. IRR assumes the interim cash can be reinvested at the IRR itself, which is often optimistic. When cash flows change sign more than once, there can be several IRRs or none at all.

FAQ

What does "No IRR exists" mean?

NPV never crosses zero for these cash flows, for example if they never pay back the investment. NPV is still meaningful.

What discount rate should I use?

Your required return: a company's WACC for a project, or a fund's hurdle rate (often 8%) for a deal.

Is a higher IRR always better?

Not necessarily. Check NPV and the size of the investment too.

How does this relate to MOIC?

The multiple shows how much money you get back; IRR adds the time dimension.

Educational use only. Not financial advice. Exact formulas: see the Methodology page