Using the Internal Rate of Return Calculator

using the internal rate of return calculator, irr

How do you calculate the internal rate of return on an investment when the cash flows vary and you can't use other financial calculators because they only function with a consistent stream of money? Well, thanks to the Internal Rate of Return Calculator, you can illustrate any varying income stream you want and get a calculated IRR. In this post, we'll show you how to use IRR for yourself or with clients. The IRR calculator is also a part of the free software version for individual investors, alongside the five Financial Calculators.

How to Use IRR for Variable Inputs

The IRR calculator was created as a way to find the rate of return on investments where you may be making variable deposits AND also receiving various income streams. For example, if you invest in oil and gas, you may make a few irregular contributions in the first few years, then receive varying income payments years later. This can help you analyze what the ROR on an asset like that would be.

For example, say you invest in an oil well where you contribute $100,000 the first year and the second year there is a $20,000 capital call (meaning you contribute $20,000 more).

Then, in the third year, there wasn't any income but starting in the fourth year you received the following income stream: $30,000, $25,000, $30,000, $28,000, and on down until in the 14th year you got your last payment of $4000. For this example, we are ignoring any tax implications on the contribution and the income. If you toggle the IRR button (in the top red bar, to the left of where the IRR appears) you'll see the projected rate: 8.80%.

 

So, how is the calculator figuring out the 8.57% return? It's taking the investment of what you put up front, then taking the income stream as listed and working backward to figure out what the account would have to earn every year to generate that specific income stream and arrive at zero in the last year. This means that you can figure out the return on any investment you make, even if you only know your money in versus your money out. This can be a valuable tool in your investing tool belt as you determine what is worth your time, or not.

Internal Rate of Return Calculations are helpful for figuring out the IRR on oil and gas deals as above, life insurance policies, real estate deals, and other investments where the money in and the money out is an uneven dollar figure every year. If you're an advisor, this calculator comes with your purchase of Truth Concepts 360*, while individual investors can access IRR with our free version of the software, alongside the five basic Financial Calculators. If you have clients who could benefit from IRR calculations, be sure to introduce them to Truth Concepts.