Internal rate of return, abbreviated IRR, is a calculation often used to compare investments such as real estate and insurance policies. In simple terms, the IRR defines the growth of your investment as a percentage. The number is calculated from the value of the investment at the end of a time period, as opposed to the initial capital and any payments made during the period. Often IRR is calculated on a one-month term, and must be extrapolated into an annualized return for accounting purposes. Multiplying by 12 gives an approximate figure, but accurate calculations use a more complex equation.
Add 1 to your monthly IRR. For example, if your monthly rate of return is six percent, you would add 1 to 0.006 for a total of 1.006.
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Raise that total to the 12th power. In this instance, that would give a figure of 1.0744.
Subtract 1 from the total. In our example, that leaves 0.0744. Expressed as a percentage, that works out to an annualized IRR of 7.4 percent.