IRR: What is the IRR

What is the internal rate of return on an asset that gains you $ 7 and costs you $15 in period 2 ?

To solve for IRR with a period zero "cost" and a period N "benefit", we can use this equation:

i = (-An/A0)^{1/N} - 1

Our example would look like this:

0 7

1 0

2 -15

Our A0 would be 7 because it is our period zero "cost".

Our An would be -15 because it is our period N "benefit".

Our N is 2 because we see the benefit in period 2.

i = (-(-15/7))^{1/2} - 1

i = (15/7)^{1/2} - 1

i = 1.463850 - 1

i = .4639 or 46.39%

page revision: 4, last edited: 24 Nov 2015 23:34