NPV & IRR Calculator
Calculate Net Present Value (NPV) and Internal Rate of Return (IRR) together. Analyze capital budgeting decisions by evaluating both the absolute value creation (NPV) and percentage return (IRR) of projects.
Understanding Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero. Think of it as the "break-even" interest rate for an investment—it represents the actual annualized return you can expect from an investment with irregular cash flows.
When to Use IRR
- Real Estate: Rental properties with varying rents and renovation costs
- Private Equity: Investments with capital calls and distributions
- Business Projects: Expansions with uneven revenue growth
- Capital Budgeting: Comparing projects with different cash flow patterns
Example Calculations
| Initial | Cash Flows | IRR | Profit |
|---|---|---|---|
| -$75,000 | $25K, $30K, $35K, $20K | 15.4% | $35,000 |
| -$200,000 | $50K, $60K, $70K, $80K, $50K | 12.8% | $110,000 |
IRR Decision Rule
Compare IRR to your hurdle rate (minimum required return) or cost of capital:
- IRR > Hurdle Rate: Accept the investment—it creates value
- IRR < Hurdle Rate: Reject the investment—better alternatives exist
- IRR = Hurdle Rate: Indifferent—investment breaks even on required return
Frequently Asked Questions
Should I use NPV or IRR for investment decisions?
Use both. NPV shows absolute dollar value created, while IRR shows percentage return. If comparing mutually exclusive projects, NPV is preferred as IRR can be misleading with different scales or reinvestment assumptions.
What's the relationship between NPV and IRR?
At the IRR rate, NPV equals zero. If your required return is below IRR, NPV is positive (good investment). If required return exceeds IRR, NPV is negative (avoid investment). They're complementary metrics.