How is Internal Rate of Return (IRR) calculated?

Gross IRR = investment cash flows

Net IRR = investor cash flows, inclusive of LP total net asset value.

IRR (according to the AICPA Audit and Accounting Guide 2019) is calculated by using the formula pictured, where

Where:
CF₀ = Initial investment
CF₁ CF₂ CF₃ ...CFn = Cash flows
n = Each period
IRR = net present value

By solving for 0 you are given the IRR aggregated for all cash flows. This calculation is included in the Excel function XIRR.

Gross IRR:
Actual dates of the cash outflows (investment purchase), inflows (cash and stock distributions), and the ending market value of the investment at the end of the period.

Net IRR:
Actual dates of the cash inflows (capital contributions), outflows (cash and stock distributions), and the ending net assets at the end of the period (residual value) of the limited partners’ capital account

Frequently asked questions about investment accounting