How do you calculate rate of return on monthly cash flows

G

Guest

Can I use the IRR formula for internal rate of return calculations for
monthly cash flows? If so do I multiply the result by twelve? If not how do I
calculate the annual IRR using monthly cash flows?

Thanks for your help.
 
F

Fred Smith

Almost all financial functions work with the *periodic* interest rate. In
other words, only you know the period. Excel simply calculates an interest
rate given the cash flows.

If your periods are monthly, and you want an annual rate, yes, you can
multiply by 12. However, this would not compound the return. Suppose your
monthly IRR is 1%. If you invested $100 at 1% per month, you would end up
with more than $112 because of compound interest. If you want the compounded
annual return, the formula is =(1+i)^12-1
 

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