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The internal rate of return is the rate of return "r" for which future cash flows of an investment equals the price of an investment. As a formula, this would be:

100 = 10/(1+r)+10/(1+r)^2+100/(1+r)^3

Assuming this was an investment which paid $10 in years 1 and 2, then $100 in year 3.

It's usually solved in excel.

My question is: is there a good way to estimate (without excel) what the rough change in IRR would be if we moved the cash flows around? i.e. how much would r increase if we receive $50 of the $100 cash flow in year 1 instead of year 3?:

100 = 60/(1+r)+10/(1+r)^2+50/(1+r)^3

Don't have a good understanding of mathematics at all, but is there a very simple arithmetic way of estimate the IRR change?

John
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When terms are short and interest rates are low, a good approximation is $(1+r)^n \approx 1+nr$ This is replacing compound interest with simple interest. If you don't earn much interest, the interest you earn on the interest is almost nothing and can be ignored. That often simplifies things greatly. You get to replace $(1+r)^3$ with $1+3r$ and $(1+r)^{-3}$ with $1-3r$ and often the equations become linear.

Ross Millikan
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