Return measurement
Internal Rate of Return (IRR)
The discount rate that makes a cash-flow series have zero net present value.
What Internal Rate of Return Means
IRR is a money-weighted return. Standard IRR assumes cash flows occur at equal intervals and usually requires a numerical solution.
Internal Rate of Return Formula
0 = Σₜ CFₜ ÷ (1 + IRR)ᵗ
How to Read the Result
An initial −$1,000 followed by $400 at each of 3 year-ends has an IRR of about 9.7%.
Limitations
- Multiple sign changes can create multiple roots.
- The reinvestment assumption may be unrealistic.
- IRR can rank projects differently from net present value.
Common Questions
When should XIRR be used?
Use XIRR when cash flows occur on actual irregular dates.