How to Calculate Internal Rate of Return on Investment

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When looking at the returns of an investment, the Internal Rate of Return (IRR) is an important metric. It allows you to compare several investments with similar durations and it is most useful when used in conjunction with other types of analyses. However, the formula for calculating the IRR is complex, so most investors use an IRR calculator or an Excel spreadsheet that has a built-in function for calculating it. The calculators will let you input the amount of time that you plan to hold the investment for and the amount of cash that will flow in and out for each period. From there, you can determine the annual rate of return.

A modified internal rate of return is almost identical to the standard IRR. It is based on the assumption that the cash flows will be re-invested. It can be calculated using four different methods: two of which use a spreadsheet package, while the other two are manual.

The formula for calculating the IRR depends on the discount rate applied to the investment. A negative discount rate means that the investment will earn less than it cost. A positive discount rate means that the investment is worthwhile.

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