Frequently asked questions
What does IRR tell me that ROI doesn't?
ROI tells you the total percentage gain but ignores the time value of money. IRR tells you the annualized return that accounts for when each cash flow occurs. An investment returning 50% over 10 years (IRR ~4%) is very different from one returning 50% over 2 years (IRR ~22%). IRR lets you compare investments of different durations on equal footing.
What is a good IRR?
It depends on the investment type and risk. Venture capital targets 25–35%+. Private equity targets 15–25%. Real estate typically targets 10–15%. Any IRR above your cost of capital (what you could earn elsewhere at similar risk) creates value. A 'good' IRR must be judged against the risk taken.
Can IRR give misleading results?
Yes, in several cases: (1) when cash flows change sign multiple times, multiple IRRs may exist; (2) IRR assumes reinvestment at the IRR itself, which may be unrealistic for very high IRRs; (3) it doesn't account for investment size. A 50% IRR on $1,000 may be less valuable than 12% IRR on $1 million.
What is the difference between IRR and XIRR?
IRR assumes equal time spacing between cash flows (annual or periodic). XIRR (Extended IRR) uses specific dates for each cash flow, handling irregular timing. If your cash flows don't occur at regular intervals, XIRR gives a more accurate annualized return.
Why can't the calculator find an IRR?
IRR requires at least one sign change in cash flows (typically a negative investment followed by positive returns). If all flows are positive or all negative, no IRR exists. Also, if the total returns don't exceed the investment, the IRR may be negative. Extreme or unusual patterns can also cause convergence issues.
How do I include the terminal value?
The terminal value (sale proceeds, residual value, or exit value) is added to the last year's cash flow. In the uniform mode, enter it separately and it's automatically added to the final year. In custom mode, add it to the last number in your comma-separated list.