IRR Calculator: How to Calculate Internal Rate of Return (2026)

IRR is the discount rate that makes an investment's NPV equal zero. Formula, rental property example, MIRR correction, and when IRR produces misleading results.

IRR answers one question: what annualized return are you getting on the cash you actually put in, accounting for every cash flow and its timing? It does not require an assumed discount rate as an input. The calculation finds the rate automatically, which is why it appears on every investor's checklist and why financial calculators have a dedicated key for it.

The IRR Calculator runs this calculation for you. This guide explains the formula, works through a real estate example, covers where IRR produces misleading results, and explains when Modified IRR (MIRR) gives a more honest number.

How to Calculate IRR

IRR is the discount rate (r) that satisfies this equation:

0 = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + ... + CFn/(1+r)^n

CF0 is typically a negative number (your initial investment). The remaining cash flows are what you receive over time.

There is no algebraic closed-form solution for r. You solve it iteratively: try a rate, see if the equation sums to zero, adjust, repeat. Financial calculators and spreadsheets (Excel's =IRR() function) do this automatically using Newton-Raphson iteration.

Worked example: rental property purchase

• Year 0: -$250,000 (down payment plus closing costs)
• Year 1: +$18,000 (net rental income after all expenses, no debt service)
• Year 2: +$18,500
• Year 3: +$19,000
• Year 4: +$19,500
• Year 5: +$19,500 operating income plus $310,000 sale proceeds = +$329,500

Plugging into the formula and solving iteratively:

• At 12%: NPV = +$9,241 (rate too low, need to try higher)
• At 15%: NPV = -$8,114 (rate too high)
• At 13.4%: NPV is approximately $0

IRR = 13.4%

That is the annualized return on $250,000 over 5 years, inclusive of all cash flows and the exit proceeds.

IRR vs NPV: Which One to Trust

IRR and NPV come from the same discounted cash flow framework but answer different questions.

NPV asks: if my required return is X%, how much value does this investment create in today's dollars? It produces a dollar amount.

IRR asks: what return does this investment actually produce? It produces a percentage, which makes it easy to compare investments of different sizes.

For a single investment decision, both methods agree. If NPV is positive at your required return, IRR will be above that required return.

Where they disagree: when comparing a $100K investment at 20% IRR versus a $1M investment at 15% IRR. IRR says the first is better. NPV shows the second creates more total value (assuming you have the capital). Always check the absolute NPV alongside IRR when comparing investments of different scales.

The Cap Rate Calculator handles the unleveraged income yield side of the same analysis.

IRR for Rental Property: A Realistic Example

Real estate IRR calculations include debt service, appreciation, and a sale event, which is where the return story gets interesting.

Assumptions:

• Purchase price: $500,000
• Down payment (25%): $125,000
• Loan: $375,000 at 7.25%, 25-year amortization
• Monthly rental income: $3,800 in Year 1, growing 2.5% per year
• Operating expenses: 35% of gross income
• Holding period: 7 years
• Exit cap rate at sale: 6.5%

Simplified year-by-year cash flows:

NOI in Year 7: $34,373. At a 6.5% exit cap rate, sale price = $34,373 / 0.065 = $528,815. Remaining loan balance after 7 years: approximately $325,000. Net to equity after $15,000 closing costs: $188,815. Year 7 total cash flow: roughly $190,700.

IRR on the $125,000 equity invested: approximately 11.2%

The equity return is meaningfully higher than the unleveraged cap rate (5.9%) because the loan amplifies the equity return while appreciation builds equity over 7 years. This is the core case for leverage in real estate investing.

When IRR Gives Misleading Results

IRR breaks down in two specific situations worth knowing.

Multiple IRRs: If the cash flow stream changes sign more than once (negative, then positive, then negative again), the IRR equation can have multiple valid mathematical solutions. A project with a large cleanup or remediation cost in a final year after years of positive income might produce two IRRs: 8% and 22%. Neither is definitively correct. In this case, use NPV with a specified discount rate instead.

Scale differences: IRR ignores the size of the investment. A $10,000 investment at 40% IRR generates $4,000 in profit. A $1,000,000 investment at 15% IRR generates $150,000. IRR ranks the first project higher; actual wealth creation says the second is better. Always check absolute NPV alongside IRR when project sizes differ significantly.

The reinvestment rate assumption: Standard IRR implicitly assumes every intermediate cash flow is reinvested at the IRR rate itself. If your IRR is 20%, the formula assumes you can reinvest annual distributions at 20% indefinitely. In most markets, that assumption is too optimistic. This inflates the apparent IRR compared to what the investment actually delivers.

Modified IRR: A More Realistic Measure

MIRR fixes the reinvestment assumption by letting you specify two separate rates: a finance rate for negative cash flows (your cost of capital) and a reinvestment rate for positive cash flows (where you realistically deploy the returns).

MIRR = (FV of positive cash flows at reinvestment rate / 
        PV of negative cash flows at finance rate)^(1/n) - 1

Example using the rental property above:

• Finance rate (cost of capital): 7%
• Reinvestment rate (expected return on reinvested proceeds): 5%
• n = 7 years

With these conservative assumptions, MIRR comes out to approximately 9.4% versus the standard IRR of 11.2%.

The difference matters for investment decisions. If your hurdle rate is 10%, standard IRR clears it and the project looks acceptable. MIRR at 9.4% falls below the hurdle. The two metrics lead to different conclusions for the same investment.

Excel's =MIRR() function takes three arguments: the cash flow range, the finance rate, and the reinvestment rate. Use it when comparing projects with large intermediate cash flows or when your standard IRR is well above realistic reinvestment opportunities.