IRR in 3 Easy Steps: Internal Rate of Return

See infographic and download FREE cheatsheet at bottom

3-Minute Overview

IRR Calculation Part 1

Part 2

Internal Rate of Return Exam Preparation – Premium Video (Free Preview)

Download my FREE Cheat-Sheet PDF on Internal Rate of Return IRR click here

MAIN POINTS

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  • Rate of return is “how fast” you can get back your money after you invest it. It’s expressed as a percentage per year, forever.

 

  • For example, if you invest $100 and get back $3 per year (forever), then your rate of return is 3% (Because $3 = 3% of $100)

 

  • Internal rate of return is the same as rate of return, except it’s not so easy to figure out like in the $3 example above.  What if you get back $3 on the first year, but another amount in other years? And what if it’s not forever?

 

  • In this case, we figure out this “mystery” rate of return (a.k.a. internal rate of return) using the IRR or Internal Rate of Return Formula:
    0 = CF1(1+irr) + CF2(1+irr)-1 +…+ CFN(1+irr)-n

DON’T panic! It’s much EASIER than it looks. Watch tutorial video below.

  • IRR is used to gauge how “profitable” a business is, taking into account the amount invested in a company or a specific project

 

  • IRR can be compared to cost of borrowing money for capital (or other sources of capital).  For example: if your company’s capital comes from borrowing money from the bank at 5% interest rate, then your IRR should be higher than 5%… if your IRR is only 3%, then you are losing 2% (because 3% IRR less 5% bank interest will leave you with negative -2%)

 

  • IRR can also be compared to your alternative investment choices.  Why will  you do a business project and earn only 3% IRR… if you can instead invest your money in a bank’s fixed term deposit which earns 4%?  You are missing an opportunity to earn an extra 1%.

Internal Rate of Return IRR

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