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Internal rate of return

The internal rate of return is an annualised (yearly) measure of the profit or loss generated on an investment. It is often abbreviated to IRR.

Say I invest £100 and two years later I sell my investment for £150. I have made a £50 profit or a 50% rate of return but it took me two years to do it so the internal rate of return is the rate of the return which, when compounded over two years, generates a return of 22.47%.

Occasionally you may see IRRs calculated for periods of less than one year – treat these with caution. If I invest £100 today and sell my investment tomorrow for £101 I have made a profit of 1% but I have made an IRR of 3678% – the calculation assumes you can keep reinvesting and making profit of 1% every day for a whole year.

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