Quick answer: Investing 70,000 and receiving 12,000, 15,000, 18,000, 21,000 and 26,000 over the next five years gives an IRR of 8.663% a year; at an 8% discount rate the NPV is 1,390.96.
How it's calculated
The IRR is the rate r at which the net present value of all cash flows is zero: CF₀ + CF₁ ÷ (1 + r) + CF₂ ÷ (1 + r)² + … = 0. The first flow is now and is not discounted. There is no formula for r, so it is found numerically, as the spreadsheet IRR function does.
NPV at your discount rate (the return you require) says whether the investment beats it: a positive NPV means the IRR is above your rate. If flows are monthly, the yearly IRR is (1 + monthly IRR)^12 − 1.
When cash flows change sign more than once (for example a later repair cost), there can be several IRRs; then NPV is the safer guide. For the time to recover the money, use the payback period calculator.
Worked examples
- −70,000, 12,000, 15,000, 18,000, 21,000, 26,000: IRR = 8.663%
- The same without the last year: IRR = −2.124%
Frequently asked questions
What is a good IRR?
One above your cost of money or the return you could get elsewhere at similar risk. That benchmark is the discount rate to enter for NPV.
Do the periods need to be equal?
Yes. Each value is one period apart. For uneven dates, a spreadsheet XIRR function is needed.
IRR or ROI?
ROI compares only start and end. IRR accounts for when each amount is paid or received, so it is better for investments with cash flows over time.
What is NPV?
Net present value: all cash flows brought back to today at your discount rate and added up. A positive NPV means the project earns more than that rate.
Why do I get no IRR?
You need at least one negative and one positive cash flow. Without both, no rate can bring the total to zero.
Can a project have more than one IRR?
Yes, if the cash flows change from negative to positive more than once. In that case, use NPV to decide.