A high internal rate of return is not automatically a good one. Whether a high IRR is always good depends on how it compares to your cost of capital, how the timing of cash flows shaped the percentage, what the calculation assumes about reinvestment, how large the underlying deal is, and what fees and taxes will do to the number before it reaches your pocket. A 40% IRR on a tiny, short-hold deal can create less wealth than a 12% IRR on a large, patient one, and a gross figure in a pitch deck can shrink dramatically once fees and carry come out.
Good Compared to What
There is no universal IRR threshold that qualifies as strong. Context sets the bar. A 12% IRR on a stabilized commercial property with predictable cash flows can be excellent on a risk-adjusted basis, while the same 12% on an early-stage startup, where most investments fail outright, would be disappointing. Private equity buyouts commonly target 20–25%, seed-stage venture capital aims for 30% or more to offset failure rates, later-stage venture sits closer to 20%, core real estate runs 8–12%, and broad public equities have averaged roughly 8–10% annually over the long run.
Those benchmarks also move with interest rates. When Treasury yields sat near zero, a 15% IRR looked exceptional. With risk-free rates above 4%, the same figure carries less punch because safer alternatives now pay more.
The cleaner test is your cost of capital. For corporations this is often the weighted average cost of capital (WACC), blending the cost of debt and equity; the average WACC for U.S. publicly traded companies in early 2026 falls in roughly the 7–8% range, varying by industry and capital structure. An IRR above WACC creates value beyond the cost of financing the project. An IRR below WACC destroys value on a risk-adjusted basis even if the raw return is positive. The size of the spread matters as much as the sign. A 22% IRR against an 8% WACC leaves a 14-point cushion for surprises. A 10% IRR against the same 8% WACC leaves only two points, and any bad news pushes the project underwater. Many investors set a hurdle rate a few points above WACC precisely to absorb estimation error and execution risk.
Why Timing Can Inflate the Percentage
IRR rewards speed. The formula discounts future cash flows, so money arriving early gets less discounting and lifts the annualized rate. Two investments illustrate the problem. Both require $100,000. Project A returns $130,000 after one year and ends. Project B returns $25,000 per year for eight years, totaling $200,000. Project A wins on IRR because the cash comes back immediately. Project B produces $70,000 more in actual profit. Picking on IRR alone leaves that money behind.
This sensitivity to timing is also gameable. A fund manager can use a subscription credit facility to delay drawing investor capital until a deal is about to close, shortening the measured holding period without improving the underlying investment. The reported IRR rises; the economics do not.
When the Formula Gives More Than One Answer
Standard investments have one sign change in the cash flow stream: money out first, money in after. When a project’s cash flows switch between negative and positive more than once, such as a mining project with a large cleanup cost at the end, the IRR equation can produce multiple mathematically valid solutions or none at all, following Descartes’ Rule of Signs. In that situation, no single IRR figure reliably represents the project’s return, and you need to lean on NPV or a modified IRR instead.
The Hidden Reinvestment Assumption
IRR assumes every dollar of interim cash flow gets reinvested at the project’s own IRR. If a deal shows a 35% IRR, the math assumes you can put each returned dollar into something else earning 35%. In real markets, reinvestment usually earns closer to your cost of capital or the prevailing market rate. The higher the headline IRR, the wider the gap between the reported figure and what you actually earn over the full cycle. A 15% IRR is only slightly overstated if you can reinvest at 10%. A 50% IRR is dramatically overstated if the best alternative use of that cash pays 8%.
The Modified Internal Rate of Return (MIRR) fixes this by letting you specify the reinvestment rate, typically your cost of capital, and the financing rate on the initial outlay. MIRR almost always comes in below the standard IRR, and it reflects what you can realistically compound. Most spreadsheet programs include a built-in MIRR function that takes the cash flow stream, the financing rate, and the reinvestment rate.
Percentage vs. Dollars: The NPV Problem
IRR ignores scale. A small side project might show a 50% IRR while generating only $5,000 in net present value. A large acquisition might return 12% while adding $3 million in NPV. If you can only pursue one, the 12% project creates far more wealth. NPV measures value in absolute dollars, which is the currency you actually spend.
For mutually exclusive choices, NPV is the more reliable guide. For ranking many independent projects under a fixed budget, IRR and the profitability index help identify the most efficient uses of each dollar. The safest habit is to use both. When IRR and NPV agree, the decision is clean. When they disagree, the assumptions behind the higher IRR usually deserve harder questioning.
What Taxes Leave You With
A strong pre-tax IRR is not a strong after-tax return. Federal tax on investment gains depends on the holding period and your income. Long-term capital gains on assets held more than a year are taxed at 0%, 15%, or 20% for 2026. High earners also owe a 3.8% net investment income tax on investment income above $200,000 for single filers or $250,000 for joint filers, which can push the top federal rate on long-term gains to 23.8%.1Internal Revenue Service. Topic No. 559, Net Investment Income Tax State taxes may add several points on top.
Fund managers taking carried interest face a stricter rule. Carry must be tied to assets held more than three years, not the standard one, to qualify for long-term capital gains treatment. Gains that miss the three-year mark are taxed as ordinary income at rates up to 37%.2Office of the Law Revision Counsel. 26 U.S. Code 1061 – Partnership Interests Held in Connection With Performance of Services A strategy that produces a high IRR through rapid turnover can deliver a lower after-tax return to the manager than a slower approach that clears the three-year bar.
Gross IRR, Net IRR, and What the SEC Requires
An IRR figure in marketing materials may be gross, meaning it was calculated before management fees, carried interest, and fund expenses came out. The gap between gross and net can be wide. A 25% gross IRR can shrink to 17% or less under a typical “2 and 20” fee structure.
The SEC’s marketing rule for investment advisers, Rule 206(4)-1, requires any advertisement that shows gross performance to also show net performance with equal prominence, over the same time period and using the same methodology.3U.S. Securities and Exchange Commission. Marketing Compliance – Frequently Asked Questions The rule reaches the credit-facility issue directly. If a fund’s gross IRR starts from the date capital was actually called rather than when investors committed it, the net IRR must use the same starting point. Mixing methodologies, such as pairing a gross IRR that excludes a subscription line’s effect with a net IRR that includes it, violates the rule.
Federal securities law also prohibits untrue statements of material fact or omissions that would mislead investors in connection with buying or selling securities.4GovInfo. 17 CFR 240.10b-5 – Employment of Manipulative and Deceptive Devices A cherry-picked IRR that conceals material costs or uses deceptive inputs can create civil exposure for the person presenting it.
Before treating any high IRR as good news, ask a short list of questions. Is it gross or net? What fees have been taken out? Over what holding period, measured from what starting date? What reinvestment rate does it implicitly assume? How does it compare with the NPV, and with your hurdle rate? A number that survives all of those questions is worth paying attention to. A number that doesn’t is just a number.