Question 1

What is a good IRR?

Accepted Answer

A 'good' IRR depends on the investment type and risk level. Generally, IRR should exceed the cost of capital. Private equity targets 20-30%, venture capital 25-35%, real estate 10-20%, and public market investments 8-12%. Compare to your specific hurdle rate.

Question 2

How is IRR different from ROI?

Accepted Answer

ROI measures total return as a percentage of investment without considering time. IRR is an annualized rate accounting for when cash flows occur. A 50% ROI over 5 years is very different from 50% IRR (which would be ~50% per year compounded).

Question 3

What causes multiple IRRs?

Accepted Answer

Multiple IRRs occur when cash flows change sign more than once (e.g., invest, receive returns, then invest more). Each sign change can create an additional IRR solution. Use NPV or MIRR in these cases.

Question 4

Why might IRR give misleading results?

Accepted Answer

IRR can mislead when: comparing projects of different sizes, cash flow timing differs significantly, reinvestment at IRR isn't realistic, or projects are mutually exclusive with different patterns.

Question 5

What is the difference between IRR and XIRR?

Accepted Answer

IRR assumes equal periods between cash flows. XIRR (Extended IRR) uses specific dates for each cash flow, providing more accurate results when cash flows are irregular or don't occur at year-end.

Question 6

Should I always choose the project with highest IRR?

Accepted Answer

Not necessarily. If projects are mutually exclusive or have different scales, NPV may be a better criterion. High IRR on a small project may generate less total value than moderate IRR on a larger project.

IRR Calculator

Important Financial Disclaimer

Initial Investment

Projected Cash Flows

Discount Rate

Decision Criteria

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