Enter an initial investment as well as the cash flow generated from that investment in each of the following years (up to 5 years) to calculate the internal rate of return.
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Internal Rate of Return Formula
The following formula is used by the calculator above to calculate the internal rate of return of an investment.
r = (x(t) – x0)^ 1/y– 1
- Where r is the internal rate of return (%)
- x(t) – x0 is the final value – the initial investment
- y is the total years of the investment.
It’s important to note that the total final value is equal to the initial investment plus the cash flow each year. This means that this equation can further be simplified into the following:
r = (x(t))^ 1/t – 1
- Where X(t) is the total cash flow generated by the investment.
Internal Rate of Return Defintion
An internal rate of return is defined as the total rate of return on investment from an internal business standpoint of view.