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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: CAGR after deposit/withdrawal Date: 8/26/2011 6:29 PM
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There are a couple of easier and more accurate ways of finding the IRR of an uneven cash flow:

1. Use the Excel XIRR function, or
2. Use the uneven cash flow function on a financial calculator

Assumng you enter your cash flows accurately, both will give you a time and dollar weighted IRR. Excel's XIRR function annualizes the reported return assuming a 365 day year. The financial calculator (I like the TI BA II Plus), gives you the return per the time period you've used in the calculation. So if this is, say, monthly, you'd multiply the IRR times 12 to annualize it.

One other thing that stumps some using one of these methods. When you enter a cash flow, it must be intered as a positive or negative number. By convention, cash flow going away from you (to, say, a savings account or 401(k) plan) are negative. Cash you remove from the investment (say, a 401(k) rollover or hardship withdrawal), by convention, are positive numbers, as is the account value at the end of the period over which you're measuring your return. Dollars that stay in the account (such as reinvested dividends) are not entered as cash flows (plus or minus) as they did not go into or come out of the account.

BruceM
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