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IRR Formula:
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The IRR (Internal Rate of Return) calculation from MOIC (Multiple on Invested Capital) provides an annualized return rate that makes the net present value of all cash flows equal to zero. It's a key metric in investment analysis to evaluate the profitability of potential investments.
The calculator uses the IRR formula:
Where:
Explanation: The formula calculates the annualized return rate by taking the t-th root of the MOIC multiple and subtracting 1 to convert it to a percentage rate.
Details: IRR is a crucial metric for comparing investment opportunities, assessing project viability, and making informed investment decisions. It provides a standardized way to evaluate returns across different time periods and investment sizes.
Tips: Enter MOIC as a dimensionless multiple (e.g., 2.5 for 2.5x return) and time period in years. Both values must be positive numbers greater than zero.
Q1: What is a good IRR value?
A: A good IRR depends on the investment type and risk profile. Generally, IRRs above 15-20% are considered good for private equity and venture capital investments.
Q2: How does MOIC relate to IRR?
A: MOIC shows the total multiple returned, while IRR provides the annualized rate of return. A higher MOIC over a shorter period typically results in a higher IRR.
Q3: What are the limitations of this calculation?
A: This simplified calculation assumes a single cash outflow and inflow, without considering intermediate cash flows or the time value of money beyond the basic compounding.
Q4: Can this formula be used for negative returns?
A: The formula works for MOIC values less than 1 (indicating a loss), but results should be interpreted carefully as negative returns have different mathematical properties.
Q5: How does the time period affect IRR?
A: The same MOIC achieved over a shorter time period will result in a significantly higher IRR due to the compounding effect over fewer years.