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Internal Rate of Return (IRR) — 1 period Calculator

Break-even discount rate (simple 1-year version).

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IRR

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Overview

The single-period Internal Rate of Return (IRR) is the discount rate that equates the present value of a future cash inflow to the initial investment cost. In this simplified model, it represents the annualized percentage return on a project that lasts exactly one time period.

Symbols

Variables

IRR = IRR, = Cash Flow Year 1, = Initial Cost

IRR
IRR
Variable
Cash Flow Year 1
$
Initial Cost
$

Apply it well

When To Use

When to use: This formula is applied to short-term investments or capital budgeting scenarios where an initial cash outlay leads to a single terminal payoff. It is most effective when comparing simple, mutually exclusive projects with identical durations.

Why it matters: It provides a clear percentage-based metric to evaluate whether a project's return exceeds the cost of capital. In the real world, it serves as a 'break-even' benchmark, allowing managers to determine the maximum interest rate a project can sustain while remaining profitable.

Avoid these traps

Common Mistakes

  • Confusing with ROI/accounting return.
  • Multiple IRRs possible (not in this simple model).

One free problem

Practice Problem

An entrepreneur invests 5,000 in a product launch. Exactly one year later, they receive a payout of 6,250. Calculate the Internal Rate of Return (IRR) for this investment.

Initial Cost5000 $
Cash Flow Year 16250 $

Solve for: IRR

Hint: Rearrange the formula to solve for IRR: IRR = (C1 / C0) - 1.

The full worked solution stays in the interactive walkthrough.

References

Sources

  1. Brealey, Richard A., Myers, Stewart C., and Allen, Franklin. Principles of Corporate Finance.
  2. Ross, Stephen A., Westerfield, Randolph W., and Jordan, Bradford D. Fundamentals of Corporate Finance.
  3. Wikipedia: Internal rate of return
  4. Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  5. Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.
  6. Internal rate of return - Wikipedia
  7. Brealey, Myers, and Allen Principles of Corporate Finance
  8. Ross, Westerfield, and Jaffe Corporate Finance