IRR is the annualized return on investment expressed as a percentage. The investment can be made up of a series of cash flows. That is, there can be more than one investment or one withdrawal. (However, there has to be at least one or each.) The cash flows may occur on any date and for any amount.
It is important to use the right sign (positive or negative) for each cash flow. How do you know what the right sign is? Think of it this way. When you first make an investment, you have to write a check. Writing a check decreases your checking account balance. Therefore, all investment cash flows, including the "Initial Investment" are entered as negative values
When you receive cash back on your investment, you can make a deposit into your checking account. This increases your checking account balance so all returns on your investment, including the final liquidation value of your investment, are entered as positive values.
Every time you change the "Initial Investment Date", the date for the cash flows will be calculated using the selected "Cash Flow Frequency" to calculate the next date. The "Cash Flow Frequency" has no direct impact on the calculated IRR per se. You use this setting to have the calculator create dates for you that most closely match your investment cash flows. If, in general, you only make additional investments (or withdrawals) twice a year, then set "Cash Flow Frequency" to "Semiannually" for example.
If you have the frequency set to say "Monthly", but there are only 4 cash flows in a given year, you can leave 2 cash flows set o 0. Zero amount cash flows have no impact on the calculated IRR. (This is true for 0 cash flow amounts after you've entered the final liquidation value as well.
It is NOT necessary to enter your cash flows in date order. The calculator will sort them prior to calculating the result. This of course is handy if you realize that you missed entering a cash flow. Enter the amount in any available cell, change the date associated with the cell and it will be sorted after you click "Calc".
If you mistakenly duplicate a cash flow, just set one of the duplicates to "0".
Click on the calculator's "Help" button for usage details or watch the video. It is VERY important that you understand about dates and cash flows..
Click to preload calculator with different examples (explanation below):
The Internal Rate Of Return (IRR) takes you to the bottom line of an investment. It calculates the annualized rate of return on a complicated series of cash flows. Compare the result against what you can earn in a risk-free investment to determine the desirability of the investment. This calculator is a main stay for financial planners, investors and accountants. This is the calculator that you want to use if you are calculating the annualized rate of return on your mutual fund investments, for example.
In technical terms, IRR is the discount rate that sets all cash inflows and outflows to 0. More weight is given to the earlier cash flows than to the later cash flows because of the time value of money.
This calculator supports irregular length periods and exact date data entry for the cash flows.
Notes for "Example 1" Initial investment (indicated by negative) $10,000. Nearly regular additional monthly investments of $250.00. One withdrawal (positive value) at period 11 for $2,500.00. Final value of the investment, available if liquidated (positive value) at period #24, $15,000.00. Annualized IRR, 8.4%. (IRR will vary slightly if you load the examples due to changes in the dates from when the examples were first calculated.)
Notes for "Example 2" Initial investment (indicated by negative) $12,000. Nearly regular monthly withdrawals (positive amounts) of $100.00. One additional investment (negative value) at period 11 for $-2,500.00. Final value of the investment, available if liquidated (positive value) at period #18, $13,750.00. Annualized IRR, 4.0%. What's important to note is that the "0.00" values after period #18 have no impact on the IRR calculation.
Notes for "Example 3" Initial investment (indicated by negative) $10,000. Nearly regular monthly withdrawals of $250.00. One withdrawal (positive value) at period 11 for $5,000.00. Final value of the investment, available if liquidated (positive value) at period #24, $1,000.00. Annualized IRR, 14.4%. Notice all the cash flows in this case are withdrawals.
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