IRR calculator

What IRR tells a lender

The internal rate of return (IRR) is the yearly return a project earns on the money put into it. Technically, it is the discount rate at which the present value of all the cash coming in equals the money going out. If a project's IRR is higher than the cost of the funds used, the project creates value; if it is lower, it doesn't.

Banks look at IRR alongside DSCR when they appraise a project or term loan. DSCR answers "can the project repay its loan each year?" IRR answers "is the project worth doing at all?"

How to use this calculator

1. In year 0, enter the investment: the project cost funded by debt and equity.
2. For each year after that, enter PAT, depreciation and interest. If there is further investment in a later year (an expansion, say), enter it in that year's investment column.
3. Add or remove years with the buttons below the table.
4. Enter your hurdle rate: the cost of funds or the minimum return you expect.

The formula

• Inflow each year = PAT + Depreciation + Interest
• Net flow = Inflow − Investment
• IRR is the rate r at which Σ Net flowₜ ÷ (1 + r)ᵗ = 0

Interest is added back because the IRR here is the project IRR: the return to everyone who funded the project, lenders and owners together. For the equity IRR, leave out interest and treat loan repayments as outflows.

Worked example

A project costs ₹1,000 lakh in year 0. Over the next five years it earns:

• Project IRR: 15.02%
• NPV at a 10% hurdle rate: ₹132.01 lakh, so the project earns more than it costs to fund
• Payback: 3.4 years

Frequently asked questions

What IRR is good for a project loan? There is no single number. Compare the IRR with the weighted cost of debt and equity: the bigger the gap, the more room the project has if things go wrong. Lenders also check that the IRR doesn't depend on aggressive projections.

Why does the calculator show no IRR? IRR needs at least one negative flow (the investment) and one positive flow. If every year is negative or every year is positive, there is no rate that balances them.

Is IRR enough on its own? No. IRR ignores the size of the project and assumes cash is reinvested at the same rate. Read it with NPV, DSCR and a sensitivity analysis of the projections.