IRR Formula for Annuities
Internal
rate of return for annuity can be calculated from annuity factor and then using
annuity table to determine the rate of return.
Annuity
Factor = Cash Outflow/ Cash Inflow
IRR Formula Example (Annuities)
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Initial investment
|
$ 6000
|
|
Return for 4 years
|
$ 2000
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|
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|
|
|
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Calculate internal rate of return
1.
Annuity Factor
= 6000/2000
= 3
2.
Find the annuity factor in annuity table
In annuity table factor 3 under the year row is appearing
under 13%. Therefore internal rate of return is 12.5%.
Check
1-(1+i)-n
I
= 3 (Annuity Factor)
= $ 2000 (Annuity amount)
x 3 (annuity factor)
= 6,011 (present value of
annuity)
