An Internal Rate of Return (IRR) Calculator
By definition, the Internal Rate of Return (IRR) is the rate of return at which the net present value of a stream of payments is equal to zero and is presented as an annualized compounded rate of return which can be earned on invested capital. The IRR provides a measure that companies can use when choosing among their investment options. For the company, the measure can provide an indication of the quality of an investment or it can be compared against expected rates of investment returns. If the company can’t find a project with an IRR greater than the return it can expect from investing in the financial markets, it may choose to invest in financial securities. While the IRR is primarily used in corporate finance, it can also help individuals to make decisions for their own lives.
The Use of Internal Rate of Return in Personal Finance
For individuals, a common use of IRR is in the evaluation of investment returns. In fact, IRR is thought by many to be the best way to track portfolio performance as it offers an annualized rate of return, accounting for both the amount invested and the length of time for the investment.
While the overall return tells you how much how have made, the IRR indicates how quickly you are seeing your returns.
Internal Rate of Return v. Discount Rate
The discount rate is the rate at which the present value of an investment or a series of investments is equal to the present value of the returns on those investments, so technically the IRR is a discount rate. The IRR can be used not only to evaluate equal investments over regular intervals, but also for any series of investments and their returns. The IRR is the rate of return per any particular time unit you want to use. However, if you use a time unit other than years, you may want to convert the returns to an annualized number for comparison purposes.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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