{"id":35193,"date":"2026-06-25T17:30:04","date_gmt":"2026-06-25T12:00:04","guid":{"rendered":"https:\/\/blogrevamp.cashfree.com\/?p=35193"},"modified":"2026-06-25T17:30:08","modified_gmt":"2026-06-25T12:00:08","slug":"what-is-irr-meaning-calculation-formula-and-example","status":"publish","type":"post","link":"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/","title":{"rendered":"What is IRR? Full Form, Meaning, Calculation Formula, and Example"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_81 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a8f29b147dc2\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #364250;color:#364250\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #364250;color:#364250\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a8f29b147dc2\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#What_is_IRR\" >What is IRR?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#Why_IRR_Matters_for_Startup_Founders\" >Why IRR Matters for Startup Founders<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#IRR_Internal_Rate_of_Return_Formula_Explained\" >IRR (Internal Rate of Return) Formula Explained<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#How_to_Calculate_IRR_3_Methods\" >How to Calculate IRR (3 Methods)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#What_is_a_Good_IRR_and_Stage_Sector_Wise_Benchmarks\" >What is a Good IRR and Stage (Sector Wise Benchmarks)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#IRR_vs_Other_Financial_Metrics_%E2%80%93_Which_Ones_to_Use\" >IRR vs Other Financial Metrics &#8211; Which Ones to Use?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#How_Cash_Flows_Affect_Your_Startups_IRR\" >How Cash Flows Affect Your Startup\u2019s IRR<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#Limitations_of_IRR_Internal_Rate_of_Return\" >Limitations of IRR (Internal Rate of Return)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#How_to_Present_IRR_in_Investor_Conversations\" >How to Present IRR in Investor Conversations<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#Conclusion\" >Conclusion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/#FAQs\" >FAQs<\/a><\/li><\/ul><\/nav><\/div>\n\n<p class=\"wp-block-paragraph\">IRR (Internal Rate of Return) is the annualized rate at which the net present value (NPV) of an investment becomes zero.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<p class=\"wp-block-paragraph\">For a startup owner, revenue, growth, and burn are the most important metrics, but there\u2019s one more: Internal Rate of Return (IRR).&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">More importantly, it&#8217;s analysed by venture investors to track how funds perform compared to each other and to other asset classes. In other words, IRR measures the time value of money, and a higher IRR means the investment made by VCs is performing.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Let\u2019s take a deep dive into what is IRR, IRR meaning, IRR formula, and how it&#8217;s an important metric to track for startups.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_IRR\"><\/span>What is IRR?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">The full form of IRR is Internal Rate of Return. It is a annualized rate at which the net present value (NPV) of an investment becomes zero.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At its core, IRR meaning is simple, as it shows the annual growth rate the investment needs to hit so that the investment breaks even according to the present-day terms.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So, IRR tells you at what growth rate your current investment can recover its cost. Anything above that is your profit. IRR doesn\u2019t tell you \u201cyour money is doubled\u201d, it tells you how fast it has happened.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><em>\u20b91 lakh today is more valuable than \u20b91 lakh three years later because you could invest today\u2019s money and earn returns. IRR adjusts for this, which is why investors rely on it.<\/em><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">To put it in context, IRR isn\u2019t about the total return, but about the speed of return, and that is what investors prefer to look at while investing.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Why_IRR_Matters_for_Startup_Founders\"><\/span>Why IRR Matters for Startup Founders<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Most founders consider IRR as an investor-only metric, which is the wrong approach. IRR directly affects how you evaluate your business in terms of growth and potential to grow.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Investors will use your IRR to compare your startup against every other opportunity they come across, and this standardises their decision-making.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Moreover, understanding the IRR changes how you operate, as in:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>How do you answer an investor question without guessing or deflecting?\u00a0<\/li>\n\n\n\n<li>How do you compare decisions objectively, like launching a new product or scaling your startup to other locations?<\/li>\n\n\n\n<li>How do you evaluate capital-heavy expenses like warehouses, hiring, tech investments, and more?<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">IRR tells investors when they will get their money back and at what rate, and this timing component is what makes IRR even more useful than ROI.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Startup Stage<\/strong><\/td><td><strong>Expected IRR Range<\/strong><\/td><td><strong>Why It\u2019s Higher\/Lower<\/strong><\/td><\/tr><tr><td><strong>Pre-seed \/ Seed<\/strong><\/td><td>30%+<\/td><td>High risk, high uncertainty<\/td><\/tr><tr><td><strong>Series A \/ B<\/strong><\/td><td>20\u201325%<\/td><td>Some traction, reduced risk<\/td><\/tr><tr><td><strong>Growth Stage<\/strong><\/td><td>15\u201320%<\/td><td>Predictability improves<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">These are standardised benchmarks, and they vary by sector, capital intensity, and macro conditions.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Also read: <a href=\"https:\/\/www.cashfree.com\/blog\/what-is-ebitda\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">What is EBITDA? Full Form, Meaning, Formula &amp; Margin Explained with Example<\/mark><\/a><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"IRR_Internal_Rate_of_Return_Formula_Explained\"><\/span><strong>IRR (Internal Rate of Return) Formula Explained<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-image size-full\"><img data-recalc-dims=\"1\" decoding=\"async\" width=\"398\" height=\"68\" data-attachment-id=\"35198\" data-permalink=\"https:\/\/blogrevamp.cashfree.com\/what-is-irr-meaning-calculation-formula-and-example\/image-100\/\" data-orig-file=\"https:\/\/i0.wp.com\/blogrevamp.cashfree.com\/wp-content\/uploads\/2026\/05\/image.png?fit=398%2C68&amp;ssl=1\" data-orig-size=\"398,68\" data-comments-opened=\"0\" data-image-meta=\"{&quot;aperture&quot;:&quot;0&quot;,&quot;credit&quot;:&quot;&quot;,&quot;camera&quot;:&quot;&quot;,&quot;caption&quot;:&quot;&quot;,&quot;created_timestamp&quot;:&quot;0&quot;,&quot;copyright&quot;:&quot;&quot;,&quot;focal_length&quot;:&quot;0&quot;,&quot;iso&quot;:&quot;0&quot;,&quot;shutter_speed&quot;:&quot;0&quot;,&quot;title&quot;:&quot;&quot;,&quot;orientation&quot;:&quot;0&quot;}\" data-image-title=\"image\" data-image-description=\"\" data-image-caption=\"\" data-large-file=\"https:\/\/i0.wp.com\/blogrevamp.cashfree.com\/wp-content\/uploads\/2026\/05\/image.png?fit=398%2C68&amp;ssl=1\" src=\"https:\/\/i0.wp.com\/blogrevamp.cashfree.com\/wp-content\/uploads\/2026\/05\/image.png?resize=398%2C68&#038;ssl=1\" alt=\"\" class=\"wp-image-35198\" srcset=\"https:\/\/i0.wp.com\/blogrevamp.cashfree.com\/wp-content\/uploads\/2026\/05\/image.png?w=398&amp;ssl=1 398w, https:\/\/i0.wp.com\/blogrevamp.cashfree.com\/wp-content\/uploads\/2026\/05\/image.png?resize=300%2C51&amp;ssl=1 300w\" sizes=\"(max-width: 398px) 100vw, 398px\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Where:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>C\u2080<\/strong> = your initial investment (negative, because it\u2019s money going out)<\/li>\n\n\n\n<li><strong>C\u2081 to C\u2099<\/strong> = cash you expect to receive over time<\/li>\n\n\n\n<li><strong>r <\/strong>= IRR (the number you\u2019re solving for)<\/li>\n\n\n\n<li><strong>n<\/strong> = number of periods (years, typically)<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Here\u2019s what this IRR formula translates to;<\/p>\n\n\n\n<p class=\"has-text-align-center wp-block-paragraph\"><em>What interest rate makes all my future cash inflows, adjusted to today\u2019s value, and exactly equal your investment?<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For founders, IRR is read along with the Net Present Value (NPV), and if<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If NPV > 0 \u2192 you\u2019re making money<\/li>\n\n\n\n<li>If NPV &lt; 0 \u2192 you\u2019re losing money<\/li>\n\n\n\n<li>If NPV = 0 \u2192 that\u2019s your IRR<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Discount Rate<\/strong><\/td><td><strong>NPV Outcome<\/strong><\/td><\/tr><tr><td>10%<\/td><td>Positive (profitable)<\/td><\/tr><tr><td>20%<\/td><td>Smaller positive<\/td><\/tr><tr><td>25%<\/td><td>Close to zero<\/td><\/tr><tr><td>30%<\/td><td>Negative (not viable)<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Now, all this gets a bit complex and difficult to manage for startup founders. Hence, this is why tools exist.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Also read: <a href=\"https:\/\/www.cashfree.com\/blog\/what-is-capital-structure\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">What is Capital Structure? Meaning, Definition &amp; How It Works in Business<\/mark><\/a><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_Calculate_IRR_3_Methods\"><\/span><strong>How to Calculate IRR (3 Methods)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">IRR calculation isn\u2019t done manually, and that is why tools are used. But you still need to understand the process underneath.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">1. <strong>Using Excel or Google Sheets<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">One of the fastest and most reliable methods for the IRR calculator, and here\u2019s how it works.&nbsp;<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li>List all <a href=\"https:\/\/www.cashfree.com\/blog\/cash-flow-management-explained\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">cash flows<\/mark><\/a> in a sequence starting with the initial investment.\u00a0<\/li>\n\n\n\n<li>Add projected inflows for every year.\u00a0<\/li>\n\n\n\n<li>Insert this formula in the spreadsheet: <em>=IRR (range)<\/em><\/li>\n<\/ol>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong><em>Year<\/em><\/strong><\/td><td><strong><em>Cash Flow (\u20b9)<\/em><\/strong><\/td><\/tr><tr><td><em>0<\/em><\/td><td><em>-10,00,000<\/em><\/td><\/tr><tr><td><em>1<\/em><\/td><td><em>2,00,000<\/em><\/td><\/tr><tr><td><em>2<\/em><\/td><td><em>3,00,000<\/em><\/td><\/tr><tr><td><em>3<\/em><\/td><td><em>4,00,000<\/em><\/td><\/tr><tr><td><em>4<\/em><\/td><td><em>5,00,000<\/em><\/td><\/tr><tr><td><em>5<\/em><\/td><td><em>6,00,000<\/em><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">For this data, the IRR is 25%, and this implies that your investment is growing at an annualized rate of 25%.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">2. <strong>Use an Online IRR Calculator<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">If you don\u2019t want to use spreadsheets, go for an IRR calculator. Get your data ready, including initial investment, cash inflows per period, and the number of periods.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The tool you choose can deliver quick results, but when you share data with investors, don\u2019t just send the data you get from the tools; validate it from MS Excel or Google Sheets. Precise information and accurate numbers are critical to get investments.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">3. <strong>Trial and Error Method<\/strong><\/h3>\n\n\n\n<p class=\"wp-block-paragraph\">This is the way IRR works behind the scenes, and this includes you choosing a discount rate, calculating NPV, adjusting the rate up or down, and then repeating until NPV is 0.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Another useful method, but don\u2019t use it to make real decisions. For best results, choose tools to calculate and understand the mechanics.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Also read: <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.cashfree.com\/blog\/what-is-burn-rate\/\">What Is Burn Rate? Meaning, Formula, Example &amp; How to Calculate<\/a><\/mark><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_is_a_Good_IRR_and_Stage_Sector_Wise_Benchmarks\"><\/span><strong>What is a Good IRR and Stage (Sector Wise Benchmarks<\/strong>)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">A good IRR doesn\u2019t work in isolation, and it only makes sense for you to compare the IRR number to the risk. Investors expect a higher IRR for riskier investments.\u00a0<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Benchmark IRR Expectations for the Startup Stage<\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><strong>Stage<\/strong><\/td><td><strong>Typical IRR Expectation<\/strong><\/td><td><strong>Risk Level<\/strong><\/td><\/tr><tr><td><strong>Pre-Seed<\/strong><\/td><td>35\u201350%+<\/td><td>Very High<\/td><\/tr><tr><td><strong>Seed<\/strong><\/td><td>30\u201340%<\/td><td>High<\/td><\/tr><tr><td><strong>Series A<\/strong><\/td><td>20\u201330%<\/td><td>Medium-High<\/td><\/tr><tr><td><strong>Series B\/Growth<\/strong><\/td><td>15\u201320%<\/td><td>Medium<\/td><\/tr><tr><td><strong>Mature \/ PE<\/strong><\/td><td>12\u201318%<\/td><td>Medium-Low<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\">Angel investors and venture capitalists target 25% to 35% IRR across their portfolio, because they know some investments will fail entirely.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">IRR also changes as per the section, as SaaS businesses have more predictable IRRs, but deep tech or hardware startups&#8217; IRR can differ widely due to longer product development timelines and higher capital requirements.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Also read: <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.cashfree.com\/blog\/pre-seed-vs-seed-funding-difference\/\">Pre-Seed vs Seed Funding: Difference, What to Raise<\/a><\/mark><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"IRR_vs_Other_Financial_Metrics_%E2%80%93_Which_Ones_to_Use\"><\/span>IRR vs Other Financial Metrics &#8211; Which Ones to Use?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><thead><tr><th><strong>Metric<\/strong><\/th><th><strong>What It Measures<\/strong><\/th><th><strong>Accounts for Time<\/strong><\/th><th><strong>Best Used For<\/strong><\/th><\/tr><\/thead><tbody><tr><td><strong>IRR<\/strong><\/td><td>Annualized % return at NPV = 0<\/td><td>Yes<\/td><td>Comparing projects, investor pitches<\/td><\/tr><tr><td><strong>NPV<\/strong><\/td><td>Total value added (in \u20b9)<\/td><td>Yes<\/td><td>Absolute value of a project<\/td><\/tr><tr><td><strong>ROI<\/strong><\/td><td>Total % return on investment<\/td><td>No<\/td><td>Quick, one-time return check<\/td><\/tr><tr><td><strong>TVPI<\/strong><\/td><td>Total value vs. invested capital<\/td><td>No<\/td><td>VC fund performance<\/td><\/tr><tr><td><strong>MOIC (MoM)<\/strong><\/td><td>Investment multiple (e.g., 3x)<\/td><td>No<\/td><td>Startup exits, portfolio tracking<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IRR vs ROI: <\/strong>ROI talks about how much money your startup has made, and IRR shares how fast it made that money. A 2x return in a couple of years is different from a 2x return in 8 years, and IRR tells this difference.\u00a0<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IRR vs. NPV: <\/strong>Use IRR to compare options, as NPV tells you the absolute value created. So you can use both IRR to make decisions and NPV to validate those decisions.\u00a0<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>IRR vs TVPI: <\/strong>TVPI also tells you about the quantum of return, but it doesn\u2019t consider the time. A 3x return is the same in TVPI regardless if its recovered in 3 years or 10 years, but IRR corrects this by factoring in speed.\u00a0<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">So, smart founders use a hybrid approach by mixing multiple metrics to identify the results.&nbsp;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>For fundraising, they use IRR with MOIC, which provides a crystal clear understanding to investors, instantly.\u00a0<\/li>\n\n\n\n<li>For internal decision-making, use IRR and NPV together.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_Cash_Flows_Affect_Your_Startups_IRR\"><\/span><strong>How Cash Flows Affect Your Startup\u2019s IRR<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">IRR is a precision-based metric, which means it\u2019s only as good as the numbers you feed into the analysis, and this is where most founders get it wrong.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At the core, IRR is a projection tool, and if your cash flows are not right, the IRR is nothing but a polished guess. Hence, founders often make two mistakes;<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Overstating Future Inflows<\/strong>: Optimism bias creeps in, and founders feed in inflated revenue projections that look clean on paper but don\u2019t reflect churn, delays, or market friction.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Ignoring Timing<\/strong>: A \u20b95 lakh payment received today is very different from one received 60 days later, and IRR penalizes delays heavily because of the time value of money.<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">For businesses where cash flow is rarely smooth, this becomes even more critical, including D2C, SaaS, and subscription businesses.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So it would be right to say that IRR doesn\u2019t improve with better math, but it needs accurate data. Hence, real-time visibility into your revenue generate matters. With Cashfree <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.cashfree.com\/instant-settlements\/\">instant settlements<\/a>, <a href=\"https:\/\/www.cashfree.com\/recurring-payment\/\">subscription billing<\/a><\/mark>, and auto-collect workflows, you can track actual inflows and stop relying on assumptions.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Limitations_of_IRR_Internal_Rate_of_Return\"><\/span>Limitations of IRR (Internal Rate of Return)<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">IRR is a widely used concept, especially by investors, and naturally, startup owners also need to check the IRRs before they get any investments. However, IRR can also mislead you if you don&#8217;t know its limitations.&nbsp;<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>IRR Ignores Scale: <\/strong>50% IRR on \u20b91 lakh investment sounds great, but not when you compare it to a 25% IRR on \u20b91 crore. So, IRR cannot tell the size of the opportunity.\u00a0<\/li>\n<\/ol>\n\n\n\n<ol start=\"2\" class=\"wp-block-list\">\n<li><strong>IRR Assumes Unrealistic Investments: <\/strong>IRR assumes that startups can reinvest all their intermediate cash flows at the same rate, which is not possible. Hence, we need to use MIRR (Modified IRR), which uses a more realistic reinvestment assumption.\u00a0<\/li>\n<\/ol>\n\n\n\n<ol start=\"3\" class=\"wp-block-list\">\n<li><strong>IRR Provides Multiple Answers: <\/strong>If cash flow changes direction multiple times, which is a common happening in startups, you will get multiple IRRs. its confusing and can destabilise your startup\u2019s growth.\u00a0<\/li>\n<\/ol>\n\n\n\n<ol start=\"4\" class=\"wp-block-list\">\n<li><strong>IRR Ignores Risk: <\/strong>Two startups can have the same IRR but different risk levels, and since it does not adjust for uncertainly, you need to factor in the risks separately.\u00a0<\/li>\n<\/ol>\n\n\n\n<p class=\"wp-block-paragraph\">Considering these limitations, startup founders present IRR in pairing with NPV to show actual created value and MOIC to show total return.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong><em>Also read: <a href=\"https:\/\/www.cashfree.com\/blog\/how-to-start-startup-india\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">How to Start a Startup in India<\/mark><\/a><\/em><\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_Present_IRR_in_Investor_Conversations\"><\/span><strong>How to Present IRR in Investor Conversations<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">Investors don\u2019t just check your IRR, but also assess whether you understand what IRR drives or not. So before going to any investor meeting, prepare a 5-year cash flow model for three scenarios:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Conservative<\/li>\n\n\n\n<li>Base case<\/li>\n\n\n\n<li>Optimistic<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Calculate IRR for each of these scenarios because what investors are really evaluating is not just the number but the consistency of your operations and the credibility of your business behind the IRR.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Be ready for questions like:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>What assumptions drive this IRR?<\/li>\n\n\n\n<li>What happens if revenue drops 20%?<\/li>\n\n\n\n<li>What exit scenario are you modeling?<\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">Investors also check for red flags in IRR numbers, including identical IRR numbers across all scenarios, overlay aggressive revenue projections, and ignore <a href=\"https:\/\/www.cashfree.com\/blog\/what-is-working-capital\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">working capital<\/mark><\/a> or cash flow timing.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\">IRR is an important metric of a startup\u2019s financial toolkit and provides investors with an easy way to look into the core workings of the organisation. IRR presents a way to understand how your decisions translate into investor returns.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">There is no perfect IRR number, but what\u2019s important is your understanding of what drives the IRR, including cash flows, timing, and assumptions. Plus, whether you are able to explain them clearly or not.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So, the best way to calculate IRR is using the IRR formula in a basic MS Excel sheet before your next funding round. Within the sheet, test scenarios and stress your assumptions using cash flows.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">With <a href=\"https:\/\/www.cashfree.com\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">Cashfree<\/mark><\/a>, you can exactly know where your money is coming from, and we are already helping thousands of Indian startups build a solid foundation. With instant settlements, subscription billing, and <a href=\"https:\/\/www.cashfree.com\/payouts\/\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\">automated payouts<\/mark><\/a>, we also offer real-time payment tracking.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">So whether you are preparing for your next round or scaling operations, Cashfree is built to help your business grow.\u00a0<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span>FAQs<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>What is IRR in simple terms?<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">IRR is the annual rate at which an investment breaks even in present value terms. It helps compare how efficiently different investments generate returns over time.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>What is a good IRR for Indian startups?<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">For Indian startups at the seed stage, a 30% IRR is considered good, as companies at this stage have high failure risks and a long gestation period. Series A startups target a 20% to 25% IRR, adjusting for the sector, market volatility, and other economic factors.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>What is the difference between IRR and ROI?<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">ROI calculates the total profit as a simple percentage, whether gain or cost over the entire period, while ignoring time. IRR annualises returns, accounts for the time value of money, and also considers the irregular cash flow.\u00a0<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>Can a startup\u2019s or any business\u2019s IRR be negative?<\/strong><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Yes, IRR values can be negative, and this means that the discounted future cash flows of a business fall short of recovering the initial investment and signal losses. This is prominent when a failed startup\u2019s outflows exceed inflows in present value.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\"><strong>In case you missed it:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-1\"><a href=\"https:\/\/www.cashfree.com\/blog\/startup-india-seed-fund-scheme-sisfs-eligibility-how-to-apply\/\">Startup India Seed Fund Scheme (SISFS)<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-2\"><a href=\"https:\/\/www.cashfree.com\/blog\/angel-investors\/\">Angel Investors: Meaning, How to Find for Startups<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-3\"><a href=\"https:\/\/www.cashfree.com\/blog\/what-is-venture-capital\/\">What is Venture Capital?<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-4\"><a href=\"https:\/\/www.cashfree.com\/blog\/what-is-accounts-payable\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is Accounts Payable?<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-5\"><a href=\"https:\/\/www.cashfree.com\/blog\/private-equity\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is Private Equity?<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-6\"><a href=\"https:\/\/www.cashfree.com\/blog\/minimum-viable-product-mvp\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is MVP in Business?<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-7\"><a href=\"https:\/\/www.cashfree.com\/blog\/trademark-registration-india\/\" target=\"_blank\" rel=\"noreferrer noopener\">How to Register Trademark in India<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-8\"><a href=\"https:\/\/www.cashfree.com\/blog\/gst-registration-online-process-documents\/\" target=\"_blank\" rel=\"noreferrer noopener\">How to Register for GST Online<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-9\"><a href=\"https:\/\/www.cashfree.com\/blog\/udyam-registration-online\/\" target=\"_blank\" rel=\"noreferrer noopener\">Udyam Registration Online: How to Apply on Official Udyam Portal<\/a><\/li>\n\n\n\n<li class=\"has-vivid-cyan-blue-color has-text-color has-link-color wp-elements-10\"><a href=\"https:\/\/www.cashfree.com\/blog\/one-person-company-opc\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is One Person Company (OPC)?<\/a><\/li>\n<\/ul>\n\n\n\n<p class=\"wp-block-paragraph\">\u00a0<\/p>\n","protected":false},"excerpt":{"rendered":"<p>IRR (Internal Rate of Return) is the annualized rate at which the net present value (NPV) of an investment becomes zero. For a startup owner, revenue, growth, and burn are the most important metrics, but there\u2019s one more: Internal Rate of Return (IRR).&nbsp; More importantly, it&#8217;s analysed by venture investors to track how funds perform<\/p>\n","protected":false},"author":142,"featured_media":35222,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"_themeisle_gutenberg_block_has_review":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_wpcom_ai_launchpad_first_post":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[9973],"tags":[],"class_list":["post-35193","post","type-post","status-publish","format-standard","has-post-thumbnail","category-business"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>What is IRR? Full Form, Formula, Calculation &amp; Examples<\/title>\n<meta name=\"description\" content=\"Learn what IRR (Internal Rate of Return) means, its formula, how to calculate IRR in Excel, and real startup benchmarks. Includes examples &amp; IRR calculator tips.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.cashfree.com\/blog\/what-is-irr-meaning-calculation-formula-and-example\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What is IRR? Full Form, Formula, Calculation &amp; Examples\" \/>\n<meta property=\"og:description\" content=\"Learn what IRR (Internal Rate of Return) means, its formula, how to calculate IRR in Excel, and real startup benchmarks. 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