How is IRR calculated?
IRR is the discount rate that makes the project's NPV exactly zero. It's solved numerically — this calculator uses Newton-Raphson with bisection fallback.
I₀ = initial investment · Fₜ = year-t cash flow · n = horizon. IRR is the unknown: the rate that equates discounted flows to the investment.
Worked example
Initial investment: $100,000. Annual flow of $30,000 for 5 years. What rate does your money return?
Solving numerically: IRR ≈ 15.24%
If your MARR was 12%, the project returns 3.24 percentage points above — viable.
If your MARR was 18%, the project returns 2.76 points below — it doesn't justify the risk. IRR alone doesn't decide: you must compare it against the MARR.
3 common mistakes when using IRR
1.Using IRR without a reference MARR
A 25% IRR sounds great, but if your opportunity cost is 30%, the project is bad. IRR alone decides nothing — always compare against a realistic sector MARR.
2.Trusting IRR with non-conventional flows
If flows change sign more than once (e.g. a re-CAPEX in year 3), multiple IRRs may exist. A single IRR only applies to projects with one initial outflow followed by positive inflows.
3.Comparing IRR across different lifespans
A 3-year project with 30% IRR isn't directly comparable to an 8-year one with 22% IRR. For that comparison use NPV or EUAW — not IRR alone.
Frequently asked questions
- Depends on the sector. As a benchmark: traditional retail 25–35%, B2B services 30–45%, food service 28–40%, e-commerce 35–60%, manufacturing 20–30%. But the number only matters compared to your MARR — not in absolute terms.