IRR Multiple Calculator
What Is IRR
Internal Rate of Return is one of the many metrics investors use to estimate the profitability of various investments and financial tools.
The IRR is a metric that calculates the rate of return that makes the net present value of the investment equivalent to zero.
In simpler terms, it is a metric, which can show us the increase in value (or the interest) the investment has to achieve in order to cover the expenses of the investment and become profitable afterward.
This tool is great when comparing various investments with each other, as well as determining which investment is economically feasible and which is not.
IRR Multiple
IRR multiple is also called the Annual Compound Growth Rate. If we are talking about multiples of IRR, we are expanding the basic concept further.
IRR multiple is essentially an indicator, which shows us the yearly compound interest rate our investment should be able to generate, in order to receive a certain multiple of our initial investment.
For example, the IRR can give an answer to the following question: “What annual interest should my investment yield, in order to double my money in the span of 3 years?”
Calculating The IRR Multiple
In order to calculate the IRR multiple, we need the following input variables.
| Input Variable | Symbol | Explanation |
|---|---|---|
| Return Multiple | X | This is the multiplier of our investment. For example, if we are wondering about the interest needed to increase our investment by 50%, then this value would be 1.5. If we are interested in tripling our investment, the value would be 3. |
| Time | T | This is the duration in years, in which we expect the investment to provide the desired return. We can also add months as a decimal part, where we take the number of months, divide them by 12, then add them as the decimal part to the whole number of years. |
Once we have the values for these variables, we can move forward to substituting them into the formula below.
IRR = (X^{1 \over T}-1)*100Worked Out Example
For this example, let’s assume the following.
| # | Assumption |
|---|---|
| 1 | You are investing $50,000 into a business. |
| 2 | You hope to multiply your investment’s value 2.5 times in the next 4 years and 3 months. |
| 3 | You are wondering what compound interest rate should your investment yield on a yearly basis to achieve this goal. |
We will start by listing the values of our variables.
| Symbol | Value | Description |
|---|---|---|
| X | 2.5 | The value of X is 2.5, as we are trying to multiply our invested money by 2.5, based on the instructions. |
| T | 4 | The value of T will be 4 as the whole numbered part since we are expecting this return in 4 whole years. The decimal part is equivalent to 3 months out of 12, which is the same as 3/12=1/4= 0.25, hence 4.25 years. |
Now we substitute these values into our formula and calculate the result. We keep in mind, that all the values are rounded to 4 decimal places as we count.
IRR = (X^{1 \over T}-1)*100= (2.5^{1 \over 4.25}-1)*100= (1.2406-1)*100
= 0.2406*100\\= 24.06\%
The interpretation of this result is, that the investment needs to yield an annual compound interest rate of approximately 24.06% a year, in order to increase the value of our investment from $50,000 to 50,000×2.5 = $125,000.
We also notice that it is not important to know the exact invested value, as long as we know the multiplier we are aiming for.