The Internal Rate of Return (IRR) is a difficult concept to understand, yet it’s a critical measure of investment performance that finance professionals must understand. We’ve written about the IRR in depth, but to further clarify these concepts we’ve created a simple to use IRR calculator. This IRR calculator is based on Excel and makes it easy to quickly calculate and visualize the IRR for any set of cash flows.
How to Use The IRR Calculator
Here is how you can use this IRR calculator, step by step.
- Download the IRR calculator using the form above.
- Adjust the number of periods you want in your holding period. Our calculator can handle any number of periods you need.
- Input your cash flows.
- View the calculated IRR
As you can see, we’ve made it simple to use our IRR calculator.
IRR Calculator Example #1
Let’s walk through a simple example using this IRR calculator. Suppose we have the following cash flows we’ve estimated for a potential commercial real estate investment property:
Initial Investment: $1,000,000
Annual Cash Flows for 5 years: $100,000, $103,000, $105,000, $110,000, $112,000
Net Sales Proceeds: $1,100,000
In order to determine if this is an investment we want to take a closer look at, we first need to calculate the IRR. To do this we simply need to input the above cash cash flows into our IRR calculator, and then view our IRR.
As you can see, the projected cash flows result in an IRR of 12.10%. What does this mean? The IRR is defined as the percentage rate earned on each dollar invested for each period invested. So, in this example, our 12.10% IRR simply means that we will earn 12.10% in each of the 5 years during our holding period. This is shown in the visual chart to the right of our inputted cash flows. As you can see, our initial investment of $1,000,000 earns 12.10% in year 1 (this is our calculator IRR). This results in a “Return On” investment of $121,000. However, since our cash flow is only $100,000 in year 1, that means we have an extra $21,000 (since we earned $121,000), and therefore this extra $21,000 gets added to our investment balance in year 2. As shown above, our year 2 investment balance is our original $1,000,000 investment balance plus the extra $21,000 in cash flow earned by not returned to us. This process repeats for every year in the holding period and is summarized in the visual chart above.
IRR Calculator Example #2
Now suppose we have more than 5 cash flows. To change the holding period all you need to do is change the optional “# of Periods” input. Then the cash flow table and visual chart will automatically update for you. As shown below, we’ve updated our cash flow projection from the example above to 10 years instead of 5. Now we instantly have a new cash flow table and visual IRR chart: