// GUIDE
What is IRR?
IRR is the rate of return on a project's actual cash flows — including the timing of deposits and withdrawals.
Definition
IRR is the discount rate that makes the net present value of a series of cash flows equal to zero. In symbols:
0 = Σ CFₜ / (1 + IRR)ᵗ
Why it matters
CAGR only works when you have one inflow at the start and one outflow at the end. IRR handles arbitrary cash flows — capital calls, partial distributions, irregular contributions — which is why it dominates in real-estate, PE, and business cases.
Worked example
Year 0: −1,00,000 (invest)
Year 1: 25,000
Year 2: 30,000
Year 3: 35,000
Year 4: 40,000
Year 5: 45,000
IRR ≈ 20.27%Common pitfalls
- Multiple IRRs. If cash flows change sign more than once, there can be more than one mathematical solution.
- Reinvestment assumption. IRR implicitly assumes you can reinvest interim cash flows at the IRR itself — often optimistic.
- Short-project bias. A 50% IRR on a 6-month project sounds amazing but adds little absolute value if the capital deployed was tiny.
IRR vs NPV
When IRR and NPV disagree on ranking, trust NPV. NPV measures absolute value created; IRR measures rate. The two metrics answer slightly different questions.