A worked example: ₹1L investment, ₹30,000/year for 5 years
A ₹1,00,000 investment returning ₹30,000 a year for 5 years has an internal rate of return of 15.24% — the single rate at which this investment's cash flows exactly break even in present-value terms.
Why IRR can't be solved directly
IRR is defined by the same NPV formula used elsewhere, but rearranged to solve for the rate rather than the value — and that equation has no algebraic shortcut once there are multiple cash flows spread across different years. Instead, the calculator tries a rate, checks whether it drives NPV to zero, and repeatedly narrows the range (bisection) until the answer is accurate to a tiny fraction of a percent.
What IRR actually measures
IRR accounts for the time value of money — cash flows received sooner are worth more than those received later — which a simple average return calculation ignores entirely. Comparing IRR to a required rate of return (or cost of capital) tells you directly whether the investment clears that bar.
Why regular, evenly-spaced cash flows matter
This calculation assumes cash flows occur at regular, evenly-spaced intervals (like annually) starting one period after the initial investment. For cash flows that arrive on irregular real-world dates, XIRR handles the uneven spacing that this formula assumes away.
The number IRR is secretly tied to
IRR isn't a separate concept from NPV — it's the specific discount rate at which that same investment's NPV crosses from positive to zero to negative. Anywhere below the IRR, the investment has a positive NPV; anywhere above it, NPV turns negative.