IRR: The annualized percentage return at which net present value equals zero—the "break-even" discount rate. Higher IRR indicates more attractive returns.
NPV at 10%: Net present value discounting all cash flows at 10% per year. Positive NPV means the investment returns more than 10%; negative means less.
Total Cash Flows: The sum of all expected cash returns from the investment, excluding the initial outlay.
Return Multiple: Total cash returned divided by initial investment. A 2.5x multiple means you receive $2.50 for each $1.00 invested.
How This Calculator Works
This calculator solves for IRR using Newton-Raphson iteration—a numerical method that finds the discount rate where net present value equals zero. NPV is calculated by discounting each year's cash flow by the discount rate. The return multiple simply divides total positive cash flows by the initial investment. IRR is useful for comparing investment opportunities, but assumes reinvestment at the IRR rate, which may be unrealistic for very high IRR values. The 10% NPV benchmark helps assess performance against a standard hurdle rate.
Quick Questions
What does a negative NPV mean?
Negative NPV at 10% means your investment returns less than 10% annually. The IRR (where NPV becomes zero) would be lower than 10%. You're better off investing at 10% elsewhere.
How do I interpret the return multiple?
A 3x return means you receive $3 for every $1 invested. This includes your original capital. A 2x return is your money doubled (1x profit), while 1.5x is a 50% gain.
Why might IRR be misleading?
IRR assumes you reinvest cash flows at the same IRR rate. For very high IRR values (e.g., 50%), this is rarely possible in practice. NPV is often a more reliable comparison metric.