Internal Rate of Return (IRR) Calculator
The internal rate of return shows the annual return an investment genuinely delivers, taking into account not only how much money you receive but when you receive it. It is the measure used to compare projects with different payment schedules — a rental property, a stake in a company, equipment, or buying out a partner. The calculator takes an initial outlay and a series of annual cash flows, then finds the rate at which their present value equals zero.
Formula and explanation
Σ CFt / (1 + IRR)t = 0
where: CF₀ = the initial investment (with a negative sign), CFₜ = cash flow in period t, n = number of periods. The equation has no analytical solution and is calculated iteratively.
IRR shows the real annual return of an investment, taking into account not only how much money you receive, but also when you receive it. This matters because 1000 received today is worth more than 1000 received in five years — earlier payments can be reinvested and generate additional return. The higher the IRR, the more profitable the investment is for you.
Methodology
What the calculator does and when to use it
The internal rate of return (IRR) is the annual rate at which the present value of all cash flows from an investment equals zero. Put simply, it is the return the project actually delivers. Unlike a plain "how much did I make in total", IRR accounts for the timing of every payment. A thousand euro received a year from now is not worth the same as a thousand euro received in five years, because earlier money can be put back to work for longer.
The calculator suits investments with a clear initial outlay followed by receipts at roughly equal annual intervals: a rental property with a planned sale at the end of the period, a stake in a company with expected dividends, machinery or software with a predictable effect on cash flow, or buying out a partner. The result is a single figure you can compare directly against the alternative — the yield on a deposit, on a government bond, or on another project you are weighing.
The formula and what each variable means
The condition IRR solves is this: the sum of all cash flows, discounted at the IRR itself, must equal zero.
- CF₀ — the initial investment. Always entered as a negative number, because the money leaves you.
- CFₜ — the net cash flow in year t, meaning receipts minus costs for that year. It can be negative if a further outlay is required in a given year.
- t — the period number, counted from the start of the investment. The initial outlay sits in period 0.
- n — the total number of periods to the end of the investment.
- IRR — the annual rate being solved for, expressed as a decimal.
With more than two periods the equation has no closed-form solution, so it is solved iteratively: pick a trial rate, compute the sum of discounted flows, then raise or lower the rate depending on the sign. A positive sum means the project earns more than the trial rate, so the rate goes up; a negative sum means the opposite. The procedure repeats until the sum is close enough to zero.
A worked example
You buy equipment for €50,000 and expect it to generate a rising net cash flow over the next five years. The table shows the flows, the discount factor at the rate found, and the present value of each payment.
| Year | Cash flow | Discount factor at 14.19% | Present value |
|---|---|---|---|
| 0 | −€50,000 | 1.0000 | −€50,000.00 |
| 1 | €12,000 | 0.8757 | €10,508.72 |
| 2 | €14,000 | 0.7669 | €10,736.56 |
| 3 | €15,000 | 0.6716 | €10,073.88 |
| 4 | €16,000 | 0.5881 | €9,410.09 |
| 5 | €18,000 | 0.5150 | €9,270.75 |
| Total | €0.00 |
The iteration runs as follows. At a trial rate of 10% the sum of the discounted flows is +€5,853.86 — positive, so the true return is higher. At 13% the sum falls to +€1,562.05, at 14% it is down to just +€245.35, and at 15% it flips to −€1,019.23. The sign changes between 14% and 15%, and a few more steps narrow the answer to 14.19%.
Notice what timing does here. You receive €75,000 in total against €50,000 invested, which is 50% above the outlay over five years. Had the same €75,000 arrived as a single payment at the end of year five, the IRR would be only 8.45%. Had the schedule been reversed — €18,000 in year one and €12,000 in year five — the IRR would be 16.42%. The same money, three different returns.
Practical guidance
Compare the result against a realistic alternative rather than judging it in isolation. Set a hurdle rate for yourself — usually the cost of the capital financing the project, or the return on the best available alternative. A project with an IRR below that hurdle is not worth doing, however positive the number looks.
Work with after-tax flows when comparing dissimilar investments. Bulgaria applies a flat 10% personal income tax. Gains on financial instruments traded on a regulated market in the EU or EEA are exempt for individuals, while rental income, dividends and the sale of a company stake each have their own treatment. Check the current rates for your specific case or consult a specialist, since the treatment also depends on whether you invest as an individual or through a company.
Cash flow forecasts are the weakest link in any IRR assessment. Build three scenarios — conservative, base and optimistic — and see under which of them the project still clears your hurdle. If the IRR becomes unacceptable on slightly lower receipts, the project carries more risk than it appears to.
Limitations and when to use a different calculator
IRR assumes every interim receipt is reinvested at the IRR itself. At high returns that is rarely realistic, because money is normally reinvested on market terms rather than project terms. Figures above 25–30% should therefore be read with some caution.
IRR says nothing about scale. A project returning 20% on €5,000 creates far less value than one returning 12% on €500,000. Always read IRR alongside net present value, which is expressed in euro.
If the cash flows change sign more than once — a major equipment replacement mid-period, for example — the equation can have several solutions and the result stops being unambiguous. In those cases rely on NPV.
When to switch calculators: if your contributions and withdrawals do not fall at equal annual intervals, use XIRR, which works with exact dates. If you have one amount at the start and one at the end with nothing in between, CAGR is enough. If you want to measure the value created in euro at a discount rate you set in advance, use NPV.
Frequently asked questions
What counts as a good IRR?
There is no universal threshold — what is good depends on the alternative and on the risk. Compare the result against the return on an investment of similar risk: a deposit, a government bond, or an exchange-traded fund. For a business project, a sensible benchmark is the cost of capital plus a margin for the risk you are taking. An IRR of 12% is excellent for a low-risk asset and poor for an early-stage venture.
What is the difference between IRR and CAGR?
CAGR works with two numbers, a starting and an ending value, and assumes no money moves in between. IRR takes a full series of receipts and payments and accounts for when each one occurs. If you invested once and withdrew once, the two measures give the same answer. Whenever there are interim contributions or withdrawals, only IRR is correct.
Can IRR be negative?
Yes. A negative IRR means the total receipts do not cover the amount invested even before timing is considered, so the investment loses capital. The calculator displays it normally. If no solution is found, the usual cause is that every flow has the same sign — there must be at least one negative and one positive figure.
Should I enter amounts before or after tax?
Pick one convention and apply it consistently across every project you compare. After-tax flows give a more realistic picture, particularly when comparing investments with different tax treatment — exchange-traded instruments that are exempt for individuals versus rental income, for instance. Mixing the two approaches makes the comparison meaningless.
Why are two projects with the same IRR not equally attractive?
Because IRR is a percentage and ignores scale. Twenty percent on €5,000 yields €1,000, while twelve percent on €500,000 yields €60,000. IRR also says nothing about how long your money stays committed. Use net present value to see the value created in euro, and read it alongside the IRR.
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The calculators are for guidance only and do not constitute financial, tax or legal advice. Parameters reflect 2026 legislation and should be verified annually. For a specific case, book a consultation with our specialists.