Learn About Internal Rate of Return (IRR)
While Internal Rate of Return (or IRR) is most commonly used to help firms determine whether or not a potential project or investment is worth pursuing, it is also a type of performance calculation you may see show up on your statements. This return calculation has to do with the movement of cash into and out of an account and the respective growth rate that causes the outflows to equal the inflows. For simplicities sake, you can consider an account that you deposited $1,000 into, then several days later when the account value was $1,500 dollars you withdrew $1,000. What is the rate of return that would result in $500 additional dollars in the account? Of course, like many types of calculations, there are limitations to using the Internal Rate of Return particularly when there is negative performance. This is why it’s helpful to look at other performance calculations including that of a Time-Weighted return which takes into account the timing of when different investments are made.