Calculator
IRR Calculator: Internal Rate of Return
The internal rate of return (IRR) is the discount rate that makes the net present value of all cash flows equal zero. It measures the annualized return on an investment, accounting for when cash goes in and comes out. Investors compare IRR to their required return or hurdle rate.
Formula
How underwriters use it
IRR rewards getting money back sooner, so two deals with the same multiple can have very different IRRs. That is why underwriters look at IRR and MOIC together.
IRR assumes interim cash flows are reinvested at the IRR itself, which can overstate returns on deals with large early distributions. For lumpy or sign-changing cash flows, check NPV at your hurdle rate as well.
Frequently asked questions
What is a good IRR?
It depends on risk. Core real estate equity is often underwritten to high single digits, value-add to low or mid teens, and opportunistic or private equity deals to 20% or more. A good IRR clears your hurdle rate with room for the risks you identified.
What is the difference between IRR and MOIC?
MOIC (multiple on invested capital) is total cash returned divided by cash invested and ignores time. IRR is annualized and time-weighted. A 2.0x MOIC over 3 years is a much higher IRR than 2.0x over 10 years.
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