IRR Calculator · Practical guide
IRR vs ROI: What's the Difference?
ROI tells you how much you made overall; IRR tells you how fast your money grew year by year.
At a glance
The Short Answer
ROI is a simple percentage gain; IRR is an annualized rate that respects timing. Invest $10,000 and collect $14,000 and your ROI is 40% — period. Whether that $14,000 arrives in 1 year or 10 years, ROI says 40%. IRR is 40% in the first case but only about 3.2% per year in the second.
Interactive tool
IRR Calculator
Enter your own values, then compare the result with the examples below.
Yearly Cash Flows
Net Present Value at Various Rates
| Discount Rate | Net Present Value (NPV) |
|---|
Same Deal, Two Numbers
Take a concrete case: $10,000 in, nothing for three years, then $14,000 back at the end of year 4.
- ROI: ($14,000 - $10,000) / $10,000 = 40%
- IRR: about 8.8% per year (the rate r where $10,000 x (1 + r)^4 = $14,000)
Both are correct; they answer different questions. ROI answers "how much did I gain?" IRR answers "what annual return did my money earn while it was tied up?"
When Timing Makes Them Diverge
With multiple cash flows, the gap grows. Two projects can share a 40% ROI while one returns money early and the other makes you wait — the early-payout project will have the higher IRR. That is why IRR is the better tool for comparing deals with different schedules, and ROI is fine for quick one-in, one-out comparisons.
Which One Should You Use?
- Quick gain on a flip or single sale: ROI is enough.
- Rental, business, or any multi-year cash stream: use IRR (enter each year's flow in the calculator above).
- Comparing against financing costs or a market benchmark: IRR, because it is an annual rate like the rates you are comparing against.
Frequently Asked Questions
Is IRR better than ROI?
For multi-year investments, yes — IRR accounts for when each dollar arrives, while ROI treats all dollars as if they arrived at once. For a single buy-and-sell with no interim cash flows, ROI is simpler and adequate.
Can ROI and IRR point in opposite directions?
Rarely on sign, but often on ranking. A project with the higher ROI can have the lower IRR if its cash arrives later, so check IRR before choosing between deals with different timelines.
How do I annualize ROI without IRR?
A rough shortcut is ROI divided by years held, but that ignores compounding. The proper annualized figure is (1 + ROI)^(1/years) - 1, which equals IRR when there is only one payoff.
Why does my IRR look low compared to my ROI?
Because IRR spreads the gain over the holding period with compounding. A 40% total return over 4 years is about 8.8% per year, not 10% — compounding makes the annual figure smaller than simple division suggests.