Internal rate of return (IRR)

The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.

Example

-250,000 followed by 18,000, 18,000, 20,000, 20,000 and 330,000 over five years solves to 11.45%.

Important

It is the rate while the capital was deployed, not a forecast of your year. Quote it with the holding period and the absolute gain, or a four-month deal making 18,000 outranks a seven-year one making 400,000.

Related terms

• Net present value — The sum of every future cash flow discounted back to today at a chosen rate, less what must be paid now.
• Money-weighted return — The single rate at which every contribution, withdrawal and the closing value balance - an IRR applied to a portfolio rather than to a deal.
• MOIC (multiple on invested capital) — Total value divided by the money put in - 300,000 back on 100,000 is 3.00x.

Lessons that explain it

• A multiple without time and cash tells you half the story — Portfolio and fund returns are described with TVPI, DPI and IRR. Each answers a different question: total value, cash actually returned, and return per year. Reading them together avoids common misinterpretations. (11 min)
• Three engines: profit growth, debt paydown and a higher exit multiple — Buyout returns come from growing earnings, using cash flow to repay debt, and selling at a higher valuation multiple - and only the first is reliably within the manager's control. (13 min)
• IRR: the measure that knows about time, and what it assumes — IRR is the rate at which every cash flow discounts back to zero. It is the right tool for irregular timings, and it systematically flatters anything held briefly. (14 min)
• MOIC: the multiple, and why it ignores time on purpose — The multiple answers one question exactly - how many times your money came back - and refuses to answer any other. Its blindness to time is a feature and a trap. (10 min)
• Time-weighted and money-weighted: two true answers — One measures the decisions about what to hold; the other measures what actually happened to your money, including when you added it. They can disagree enormously. (13 min)
• One investment in twenty pays for the other nineteen, or nothing does — There is no coupon and no dividend here. The return is realised only at an acquisition or a listing, most positions return little or nothing, and the entire portfolio's economics usually rest on one or two outcomes out of many. (12 min)

All 578 terms in the Investing glossary