IRR (Internal Rate of Return)

Also called: Internal Rate of Return

IRR is the annualized rate of return an investment generates over its hold period, accounting for the size and timing of every cash flow in and out. It assumes cash flows occur at regular, evenly spaced intervals, such as annually.

Example

A $200,000 investment returning $30,000 at the end of each of the first 4 years and $280,000 at the year 5 sale works out to an 18.5% IRR.

Formula

IRR = the discount rate at which the Net Present Value of all cash flows equals zero

Excel Formula:

• B2 = Year 0 cash flow, -200000
• B3:B6 = Years 1-4 cash flow, 30000 each
• B7 = Year 5 cash flow, 280000