Why investors speak in IRR
When a VC says "we target 30% IRR," or a real estate developer promises "25% IRR," they mean the annualised return that makes NPV = 0 on all the cash flows.
IRR is the lingua franca of investment returns because it:
- Accounts for time value of money
- Is scale-independent (% return, not absolute)
- Is comparable across projects of different sizes and durations
IRR benchmarks in India (2024)
- Startup venture capital: Target IRR 25–40% (reflecting high failure rate)
- Private equity (growth stage): Target 18–25%
- Real estate development (plotted land/villas): Projected 20–30% (often overstated)
- Listed equity (Nifty 50): Historical 12–14% CAGR
- SME expansion (equipment, outlets): Acceptable 15–20%
- Debt instruments: Bank loan rate + 3–5% risk premium
The reinvestment rate problem
IRR implicitly assumes that interim cash flows (year 1, year 2 returns) are reinvested at the same IRR. For high-IRR projects, this is unrealistic.
Example: A project with 30% IRR and large Year 1 cash flows assumes you can reinvest those flows at 30% — usually impossible. MIRR with a realistic 12% reinvestment rate would give a lower, more honest return figure.
For real estate developers reading this
Promoted IRRs on real estate projects often assume:
- Full capital invested upfront (actual cash calls are phased)
- Optimistic exit valuations
- No holding period delays
Ask developers for the XIRR (Excel IRR for irregular cash flows) and verify exit cap rate assumptions independently.