IRR Calculator
Internal Rate of Return tells you the effective annual return of an investment with multiple cash flows. Compare it to your hurdle rate (required return) to decide if a project is worth pursuing.
IRR in Practice: US vs UK Project Appraisal
United States: IRR is widely used in private equity, venture capital, and corporate finance. Private equity funds typically target IRRs of 20%+ on individual investments. The OMB uses it alongside NPV for regulatory analysis.
United Kingdom: The HM Treasury Green Book cautions against relying solely on IRR, preferring NPV. However, the Modified Internal Rate of Return (MIRR) is sometimes used to avoid IRR's reinvestment assumption issues.
Real estate globally: Real estate investors worldwide use IRR to evaluate property deals. A "levered IRR" includes the effect of mortgage financing. Typical targets: 12–15% for core-plus real estate, 18–25% for opportunistic deals.
IRR vs NPV: When to Use Each
| Metric | Best For | Limitation |
|---|---|---|
| NPV | Absolute value creation | Requires knowing the discount rate upfront |
| IRR | Comparing projects of different sizes | Can give multiple values; ignores scale |
| MIRR | More realistic reinvestment assumption | Less widely understood |
| Payback Period | Quick liquidity check | Ignores time value of money entirely |
Frequently Asked Questions
What is IRR?
The Internal Rate of Return (IRR) is the discount rate that makes the NPV of all cash flows equal to zero. It represents the project's effective compounded annual return. If IRR exceeds your required/hurdle rate, the project is worth pursuing.
How is IRR used in the UK and US?
Both the US and UK use IRR for capital budgeting, but apply different benchmarks. US companies typically compare IRR to their WACC. UK public sector projects are evaluated under HM Treasury's Green Book, which prefers NPV but accepts IRR as a complementary measure when comparing projects with different scales.
What are typical IRR targets by asset class?
Private equity buyout funds typically target IRRs of 20–25%. Venture capital: 25–35%+ (reflecting higher risk). Core real estate: 8–10%. Value-add real estate: 12–16%. Infrastructure: 7–12%. The higher the risk, the higher the required IRR. These benchmarks apply globally, though local tax treatment affects after-tax IRR.