What Is a Good IRR? Evaluate the Cash Flows Behind the Percentage

Evaluate an IRR using a complete cash-flow example, fees, sale assumptions, risk and NPV. Learn what a headline return can and cannot establish.

A proposal shows a 17.11% IRR. Before comparing that number with a target, find the payment that makes it possible.

In the example below, the investor receives $10,000 a year and expects a $150,000 sale at the end. Change that sale to $50,000 and the IRR falls to zero. Both calculations can be correct. The difference is the assumption about money that has not yet arrived.

A useful assessment of an IRR needs the full cash-flow schedule, a relevant comparison rate, and a view of how dependable the inputs are. There is no universal percentage that makes every property, fund or business project a good investment. This guide follows one hypothetical schedule all the way from a headline return to the conditions it requires.

Open the schedule before judging the rate#

Assume an initial $100,000 payment. The investment then distributes $10,000 at each of five year-ends. At the end of year five it is also sold for $150,000, net of the sale costs included in this hypothetical starting schedule. There are no other payments or residual assets.

Copy these amounts into the IRR workspace in annual mode:

-100000
10000
10000
10000
10000
160000

The annual IRR is 17.11238987%. At a hypothetical 10% discount rate, NPV is $31,046.07. Total receipts are $200,000, including the sale, so the receipt-to-payment multiple is 2.00x and nominal gain is $100,000.

These numbers describe different things. The multiple and nominal gain ignore timing. IRR is the rate that discounts the complete schedule to zero. NPV measures modeled value in dollars at a separately chosen rate. The 17.11% does not mean that $17,110 reaches the investor's bank account every year.

In a spreadsheet, put the six amounts in A2:A7. Use =IRR(A2:A7) and =NPV(10%,A3:A7)+A2. The initial payment is outside the NPV function because that function treats its first supplied amount as one period later. Microsoft IRR, Microsoft NPV.

Ask how much of the answer depends on the sale#

The five distributions add up to $50,000. The forecast sale supplies the other $150,000 of receipts. To examine that dependence, keep every distribution and date unchanged and vary only the net sale proceeds.

At a $100,000 sale, the $10,000 annual distributions and return of original capital match the 10% hurdle exactly. At a $50,000 sale, all receipts merely add up to the original $100,000. The zero IRR does not show how long capital was tied up; inspect the receipt dates and discounted value as well.

You can also work backward. To reach a 10% annual hurdle, how much must the investment pay in year five after the first four $10,000 distributions?

Required year-5 receipt
= [100,000 - 10,000/1.10 - 10,000/1.10^2
   - 10,000/1.10^3 - 10,000/1.10^4] × 1.10^5
= 110,000

Required net sale, after the year-5 distribution
= 110,000 - 10,000
= 100,000

That gives you a concrete assumption to investigate: the forecast must support at least a $100,000 net sale under these other conditions to reach the stated hurdle. It does not establish the probability of getting that price. A forecast model cannot supply evidence about buyers, leases or sale costs that was never entered into it.

Choose a hurdle that answers the same question#

A hurdle is a minimum required return for the comparison being made. The 10% used here is an illustration, not a recommended market rate.

Before importing a benchmark from a chart, establish what it measures:

The SEC's investor guidance recommends examining the basis of performance claims, including fees, comparisons and hypothetical results. A target does not become observed performance because it appears in a table. Investor.gov: Performance Claims.

For a conventional schedule with an initial outflow followed by positive receipts, NPV falls as the discount rate rises. In that setting, an IRR above the chosen hurdle corresponds to positive NPV. That is a statement about the specified schedule and rate. It does not settle whether the assumptions are credible, the risk is acceptable or another use of the money is preferable.

The rule also needs different treatment when later outflows create multiple roots. The two-IRR reference case has roots at 10% and 20%, yet its NPV is negative at a 5% hurdle. Selecting the larger IRR would obscure the shape of the problem.

Recalculate fees as cash flows#

Suppose the starting example omitted a $2,500 setup charge and a $500 charge at each year-end. Add those specific charges to the original schedule. The initial outflow becomes $102,500; each subsequent receipt falls by $500.

The after-charge IRR is 16.00597944%, and NPV at the same 10% hurdle is $26,650.67. The $5,000 of nominal charges reduce present value by $4,395.39, because some charges occur later. The annual-return reduction is about 1.10641043 percentage points for this particular schedule.

A different fee timing or exit value would produce a different gap. There is no fixed percentage-point deduction that converts all gross IRRs to net IRRs. These labels refer only to the charges stated here; the example excludes income taxes and makes no claim to satisfy a formal performance-reporting standard. Investor.gov: Fees and Expenses.

Put scale and time back into the decision#

Consider two one-year projects, both fully fundable and assumed to have comparable risk for this illustration:

The larger project adds more modeled value at 10%, despite the lower IRR. That comparison assumes you can fund it. If capital is limited, projects can be combined, or their risks differ, the decision needs those constraints too. You can reproduce both in the project comparison cases.

Holding periods matter separately. Receiving twice your initial payment after two years implies about 41.42% annual growth; receiving the same multiple after five years implies about 14.87%, when there are no intermediate flows. A short holding period does not prove that equally attractive opportunities will remain available afterward.

A practical way to read the next proposal#

Begin with the complete signed schedule and mark each amount as received, contractually due or forecast. Separate investor cash flows from property or business cash flows. Reconcile the exit value, fees and any remaining debt before calculating.

Then state the comparison rate and examine what must be true to meet it. Change the largest uncertain assumptions one at a time. Keep nominal gains, NPV, capital required and timing beside the return. If an assumption drives the conclusion, make its evidence the subject of further investigation.

The IRR & XIRR workspace calculates from up to 500 rows and exposes discounted cash flows, NPV, annual-case MIRR and candidate roots within its search limits. It does not assess risk or add omitted fees automatically. The cash-flow reference library supplies smaller examples for diagnosing individual issues.

The examples are hypothetical and independently checked mathematically. They are not observed market benchmarks or a professional assessment of an investment. This revision replaces unsupported benchmark ranges with complete schedules and stated assumptions.