Return on Investment (IRR)

This tool calculates the Internal Rate of Return (IRR) for a series of cash flows.

All deposits and receipts are considered to have occurred at the beginning of the period.

No script is provided for this calculator.

Here is an example of the Return on Investment (IRR) Calculation:

Example Schedule of Cash Flows

The above example assumes an initial investment of ten thousand dollars with quarterly cash inflows (after tax dividends, rent income, etc.) of $200.  Finally at the end of the year, we assume the asset is sold for its purchase price (a positive cash flow of $10,000). plus the fourth quarter cash flow of $200.

The monthly (period) rate of return is .7247 %.  This can be verified by using either a spreadsheet or a financial calculator using the IRR function.  If you used a financial calculator with a CF0 (cash flow at time zero), be sure to place the cash flows correctly.  For example, the minus $10,200 will be CF0, then $0 for CF1, $200 for CF2, $0 for CF3, $0 for CF4, $200 for CF5 etc.  Notice the cash flows are shifted due to the “zero cash flow”.

To convert the monthly rate of .7247% to an annual rate; the following equation is used:

Annual rate = (1 + period rate) ^ (periods in a year)

So for a monthly rate this will be:

Annual rate = (1 + monthly rate) ^ (12)

And for the specific example of .7247%, the annual rate will be:

Annual rate = (1 + .007247) ^ (12)  = (1.007247) ^ 12 =  1.09051

Convert the compounding rate of 1.09051 to a percent by subtracting one and then multiplying by 100.  This gives an annual rate of return of 9.051%.