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Ever since Google unveiled RankBrain as the latest leap in their search algorithm’s efficiency just a day after Christmas last year, the ripples it created in the SEO universe have refused to settle down. That’s saying a lot. because RankBrain isn’t really even an algorithm update, it is actually a part of the current version of the algorithm named “Hummingbird” which dates back to a 2013 launch.

With Hummingbird, Google started paying a lot more attention to an entire search query rather than just the keywords. The mission of Hummingbird is to understand the overall context of a sentence and not just specific words. RankBrain takes this effort several steps forward.

What sets this new AI feature apart from the other many changes that Google has brought in recently, is that it defies the common notions of SEO and forces content marketers and publishers to go back to the fundamentals. Chances are that you too came here looking for little tricks and hacks that is going optimise your content for RankBrain. You should certainly read on then.

What NOT to do to your content for RankBrain 1. Optimise for “verbose queries” to tackle language interpretations

RankBrain helps Google understand “verbose queries” when people make ambiguous searches or use colloquial terms. It is Google’s attempt at understanding the staggering 15% of its 3.5 billion daily searches that the giant has never seen before.

Language however, is immensely diverse. Optimising for search keywords is one thing and optimising for the infinite lingual variations of those keyword is a whole different ball game. Trying to tweak your content to include colloquially alternative keywords will not only be a turn-off to your readers, you might also find yourself going down the rabbit hole pushing money towards bidding for endless ad-groups on adwords based on such ambiguous keywords.

Let’s take an example: RankBrain will connect a keyword like “Einstein” to “Scientist”, “Messi” to “Football / Soccer midfielder”, “Google” to “Android”, “Android” to “Lollipop”, “Lollipop” to “Galaxy”, “Galaxy” to “Samsung”. However, and this is important, RankBrain will also potentially weigh out the probability of accurate connections between “Galaxy and Milky Way” and “Lollipop and Sweet”. Here’s a graph showing just first degree connections that RankBrain would make.

While for humans these are clearly-linked connections (and that’s the point of RankBrain), you can imagine how optimising on a web of taxonomically similar keywords would be an endless effort.

2. Confuse RankBrain with Knowledge Graph and Hummingbird

RankBrain on the other hand, takes these “search entities” to predict the most accurate results to verbose and new queries that the search engine has never encountered before. The AI then uses probability scores as a metric to substantiate the search results.

An good example would be if we query something like below:

Here, you’ll notice RankBrain working together with Knowledge Graph and Hummingbird’s semantic search. Before RankBrain kicked in, the search results for this query would not have been this helpful. For instance, RankBrain connected Edwardo to the query and found the relevant Wikipedia document working hand-in-hand with Knowledge Graph and semantic keyword matching. Earlier, I would be required have “Priscilla” somewhere in the query for the results to be this in-depth.

As you can see, RankBrain makes heavier usage of search entities than Knowledge Graph which as a function decides how a combination of external objects are connected to a query. We can say it’s a model that explains how different pieces of content on the web are linked to one another.

Confusing RankBrain with knowledge graph will mean that you’ll start concentrating on optimising your pages other than the main landing pages for the same keywords with a hope that RankBrain picks them up. This will ultimately land your pages in a soup of keywords, anchor texts and sometimes even bad backlinks in order to create external objects connected to your pages. I am sure you are seeing where this is going – you will be unwittingly entering the ugly world of Gray Hat SEO.

3. Ask the wrong optimisation question: How can we optimise for RankBrain?

It should be pretty clear by now that this is the wrong to question to ask in the first place. RankBrain focuses on verbose queries riddled with colloquial phrases. Any good SEO specialist will tell you that it’s a bad idea to create individual pages for each long-tail keyword you discover for your niche. Similarly, trying to create pages or optimise existing ones for RankBrain queries is even less useful

So what SHOULD you be doing for RankBrain? 1. Optimise for content using semantic SEO practices:

Help humans and ultimately Google get a better understanding of what your content is all about and what the context of your pages are. Revisit your keyword strategy and create three levels of keywords – Core, Thematic and Stem:

Core keywords: It starts at the basic – a list of keywords that closely defines your content, product or business. Create very closely connected first-degree variations of these and add them to the list. These keywords should be highly relevant so that Google can consider your pages if a query has any of your keywords when searched.

Thematic Keywords: Next step is to find thematic words that are conceptually related to your core keywords. For example, if a core keyword is “Mayfair plumpers”, a thematic keyword would be “london apartments”. This will help Google find your pages for a query like “low cost london apartment plumbers”.

Stem Keywords: This is where you try to understand how a searcher would ask questions on Google. The way to do it stems a lot on how you did your customer discovery effort, something that deserves a post of it own. Coming down to the essentials, your goal is to anticipate what a visitor would be expecting to find on your page if they visited it after they searched.

Let’s take the plumber example. If someone found your page by searching for “low cost london apartment plumbers”, it would be fair enough to say the user might also be thinking of “finding low cost london apartment plumber contacts”. Your stem keywords should be variations of these.

2. Work on branding:

Once you start realising that Google’s moving very strongly towards showing personalised results for each user, branding will come in as a very strong segment to look at. It’s a strategy that works perfectly with the philosophy of RankBrain and Hummingbird as they concentrate on interpreting content based on semantic connections.

3. Do the fundamentals right:

In the world of optimising for machines, it’s easy to forget who you are ultimately creating a business for. Who your ultimate target is – humans. Create content that makes sense to your real users – clear copy, sound structure, easy navigation, useful information and natural calls to action. These are the primary pillars of a well thought out page. Offer something meaningful to your users – that’s the golden rule.

Have you seen effects of RankBrain in how people are discovering your brand or content pages? Have insights or perspectives share? I’d love to know!

You're reading Understanding Conversion Rate Optimisation And Seo After Rankbrain

20 Ways To Increase Conversion Rate Optimization For Ppc Advertising

The mindset of implementing a paid search campaign usually begins with determining what keywords and phrases will bring targeted traffic to a website.  And as critical as this thought process is, a shift to the idea of what targeted traffic will produce the most conversions is in fact a better route to go. “Well, Justin isn’t that the same thing?”  And my answer is “Not really.” While one starts with the creation of a campaign, the latter starts with the end goal centered on conversions. Most PPC Managers think they are considering this point, but four months into a campaign with high cost/conversions and less than appealing conversions, we soon realize we didn’t build out PPC strategies the right way. We didn’t focus initially on the conversion metrics that are important to our companies or our clients.

Determine What Conversions To Track

Reverse Engineer The Path Of Purchase

Most shoppers start at the brand awareness stage and then usher themselves to choosing who to purchase from.  But they may have many avenues to get to that decision. Google Analytics has a nifty tool in many of their reports that showcases behavior, acquisition, and conversion flow. If you have picked up enough data to do this, go to these reports and determine where most of your shoppers are coming from and the standard path to purchase they are taking. You may determine a few pages are assisted conversion paths that are the second or third pages they visit before purchases or end conversions (not including the checkout page).

Don’t forget mobile versus computer and tablet.  There are cross device reports in Google AdWords where you can see where users are making purchases, but more importantly what channels are impacting their purchasing decisions.

Google Conversions & Analytics Segment (My Top 6 Favorite Features)

Screen Taken 4-15-2014

As PPC Managers can attest, the segment views in Google AdWords is extremely useful.  If you are running and tracking conversions, you can make appropriate comparisons across the many segments available.

Time: By viewing the many dimensions of time (i.e day of week, hour of day), you can get a decent idea of what time you are getting more conversions as well as the cost/conversion across each segment. Go to your Setting Tab to set the right schedule that makes the most sense for your campaign and the conversions you want to garner.

Conversion Rate Optimizer: 

For those who love to automate, Google AdWords’ Conversion Rate Optimizer will do the trick. You have to gather enough data (minimum 30 conversions) and in particular conversions for this to work, but overtime Google will dynamically bid on your behalf based on where you are likely to get the best

cost per conversion


Remarketing & Segmented Lists

Sometimes we need remarket to shoppers who engaged with our brand but didn’t purchase. A marketer’s goal should always be to increase standard conversions in a cost-effective way, but if you have the technology to remarket to those buyers…….well remarket to those buyer.

Ecommerce Lovers – Product List Ads (Or The New)

Align Ad Copy With Landing Pages

PPC ad copy must be aligned with the right landing pages.  Using a furniture example, if someone is searching for a sectional sofa, and you’re sending them to your overall sofa category and you have sectional sofas, you could be losing out on shoppers who are either too lazy to search for those sectional sofas or simply cannot find them on your site.

Proper Landing Pages (Sorry, I Had To!)

I said I would not go there, but I must. The set up of your landing pages (e-commerce or not), is the best digital marketing investment one can make. Say you are a business that sells a product or service to other businesses.  Do you have case studies that are intriguing and truly show you solved specific consumers’ problems?  Do you an engaging FAQ page that is not simply a list of FAQ’s but instead of short video of the CEO answering half or most of the FAQ’s?  Focusing more on the layout, feel, CTA’s, and content of your website and its landing pages will improve overall conversions.  Remember that a conversion does not have to solely be a purchase.  You have many other conversions to track and if we know those conversions have the potential to lead to a sale then we are well on our way.

Leverage Special Offers

Negative Keywords

Screenshot taken 4-15-2014

Leverage Mobile More Pseudo Automate (Now The Fun Begins)

I am not the biggest fan of automating PPC campaigns, but when you have big budgets and a lot to manage, developing this level of efficiency from past experience can make you a better marketer and even improve conversions. If you find those hot spots that improve conversions, create rules within Google AdWords that exploit these opportunities.


Maybe as a PPC marketer, your focus is more brand awareness than purchases or other sub-macro conversions.  However, it’s important to consider the brand awareness metrics that are critical to your campaign and measure conversions that take shape for those keywords.

Featured Image Credit: Leszek Glasner via Shutterstock

Rate Variance And Volume Variance

Rate Variance and Volume Variance

You have learnt how to create measures for Annualized Cost Per Head and Total Headcount. You can use these measures to create Rate Variance and Volume Variance measures.

Rate Variance measures calculate what portion of a Currency Variance is caused by differences in Cost Per Head.

Volume Variance measures calculate how much of the Currency Variance is driven by fluctuation in Headcount.

Creating Variance to Budget Rate Measure

You can create Variance to Budget Rate measure as follows −

VTB Rate:=([Budget Annualized CPH]/12-[Actual Annualized CPH]/12)*[Actual Total Head Count]

Creating Variance to Budget Volume Measure

You can create Variance to Budget Volume measure as follows −

VTB Volume:=[VTB Total Head Count]*[Budget Annualized CPH]/12

Analyzing Data with Variance to Budget Measures

Create a Power PivotTable as follows −

Add the fields Fiscal Quarter and Fiscal Month from Date table to Rows.

Add the measures Actual Annualized CPH, Budget Annualized CPH, VTB Rate, VTB Volume, VTB Sum to Values.

Add the fields Fiscal Year from Date table and Sub Class from Accounts table to Filters.

Select FY2023 in the Fiscal Year Filter.

Select People in the Sub Class Filter.

Filter Row Labels for Fiscal Quarter values FY2023-Q1 and FY2023-Q2.

You can observe the following in the above PivotTable −

VTB Sum value shown is only for Sub Class – People.

For Fiscal Quarter FY2023-Q1, VTB Sum is $4,705,568, VTB Rate is $970,506,297, and VTB Volume is $-965,800,727.

VTB Rate measure calculates that $970,506,297 of the Variance to Budget (VTB Sum) is caused by the difference in Cost per Head, and $-965,800,727 is caused by the difference in Headcount.

If you add VTB Rate and VTB Volume, you will get $4,705,568, the same value as returned by VTB Sum for Sub Class People.

Similarly, for Fiscal Quarter FY2023-Q2, VTB Rate is $1,281,467,662, and VTB Volume is $-1,210,710,978. If you add VTB Rate and VTB Volume, you will get $70,756,678, which is the VTB Sum value shown in the PivotTable.

Creating Year-Over-Year Rate Measure

You can create Year-Over-Year Rate measure as follows −

YoY Rate:=([Actual Annualized CPH]/12-[Prior Year Actual Annualized CPH]/12)*[Actual Total Head Count]

Creating Year-Over-Year Volume Measure

You can create Year-Over-Year Volume measure as follows −

YoY Volume:=[YoY Actual Total Headcount]*[Prior Year Actual Annualized CPH]/12

Creating Variance to Forecast Rate Measure

You can create Variance to Forecast Rate measure as follows −

VTF Rate:=([Forecast Annualized CPH]/12-[Actual Annualized CPH]/12)*[Actual Total Head Count]

Creating Variance to Forecast Volume Measure

You can create Variance to Forecast Volume measure as follows −

VTF Volume:=[VTF Total Head Count]*[Forecast Annualized CPH]/12

Analyzing Data with Variance to Forecast Measures

Create a Power PivotTable as follows −

Add the fields Fiscal Quarter and Fiscal Month from Date table to Rows.

Add the measures Actual Annualized CPH, Forecast Annualized CPH, VTF Rate, VTF Volume, VTF Sum to Values.

Add the fields Fiscal Year from Date table and Sub Class from Accounts table to Filters.

Select FY2023 in the Fiscal Year Filter.

Select People in the Sub Class Filter.

Filter Row Labels for Fiscal Quarter values FY2023-Q1 and FY2023-Q2.

Creating Forecast Variance to Budget Rate Measure

You can create Forecast Variance to Budget Rate measure as follows −

Forecast VTB Rate:=([Budget Annualized CPH]/12-[Forecast Annualized CPH]/12)*[Forecast Total Headcount]

Creating Forecast Variance to Budget Volume Measure

You can create Forecast Variance to Budget Volume measure as follows −

Forecast VTB Volume:=[Forecast VTB Total Head Count]*[Budget Annualized CPH]/12

Analyzing Data with Forecast Variance to Budget Measures

Create a Power PivotTable as follows −

Add the fields Fiscal Quarter and Fiscal Month from Date table to Rows.

Add the measures Budget Annualized CPH, Forecast Annualized CPH, Forecast VTB Rate, Forecast VTB Volume, Forecast VTB Sum to Values.

Add the fields Fiscal Year from Date table and Sub Class from Accounts table to Filters.

Select FY2023 in the Fiscal Year Filter.

Select People in the Sub Class Filter.

Filter Row Labels for Fiscal Quarter values FY2023-Q1 and FY2023-Q2.


Home Tour: Before And After

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The beginning of June marked our 2 year anniversary of living in our current house. The road to this point was a long one. We had lived in a townhouse for 6 years and knew that it was time to move to somewhere with more land. We knew that we would be uprooting the kids, but it still felt worth it. The neighborhood that we previously lived in was very beautiful. I loved the pond and sidewalks that provided a lovely place to run. I miss that part of it the most.

We looked at a variety of houses before coming to this one. My favorites were the mid century ones. To me, they are the ones that “got away.” Almost all of the houses we looked at were in this area of town. It’s rural, but still close enough to the city that we don’t feel isolated.

I thought it would be fun to do a before and after of our house. All of the before pictures were taken with the previous owner’s stuff in them. They had lovely taste, but our style is very different.

The house itself is very pretty and we were instantly smitten. One walk through the backyard and we were hopelessly in love. We’ve cleared out a lot of the bigger plants to simplify the house. I’ve painted the doors (the shutters still need to be replaced or painted.) The brass door plates were removed to avoid harassment from insane cardinals who were constantly knocking on the door or dive-bombing the house.

The First Floor

The Living Room BEFORE

I removed the picture moldings and painted the top halves of the walls a lovely aqua (Benjamin Moore Galt Blue.)

A collection of paint by numbers now hangs in here. Most of my furniture is vintage, either thrifted or from craigslist. The sofa and green chair will be recovered one day. The white IKEA chair will be replaced in the very near future. The aqua cabinet in the corner holds linens. This whole room will be getting an update in the nearish future. Some of the furniture will move to accommodate other pieces that need to moved. The French door takes you into the sunroom.

Sunroom BEFORE

Sunroom DURING

This room needs a ton of work still. The dog damaged the drywall in several areas and they are in the process of being repaired. Also, I’m not sure the grout was ever sealed. This is after cleaning it for several hours. I’m going to just use that grout paint stuff. The room will be repainted, but I haven’t figured out what color yet.

At my children’s insistence, I kept the quote that was painted above the windows.

Dining Room BEFORE (And also a look into the family room.)

Dining Room AFTER.

We replaced the light fixture with my vintage tole chandelier that I bought in Italy. It’s one of my prized possessions. My husband made the table and the chairs are from Target. This room will have some small changes coming. The china cabinet will be moved to knock out that wall for the fridge. This will cause other pieces to be moved as well.

Another family room BEFORE

Family room DURING

This room is hard because it’s so narrow and has doorways that dissect it. It is normally a junk room. One day I hope it’s beautiful AND used. Right now, it’s not. It doesn’t look like this right now. Most of this stuff has been moved to other rooms and it is currently holding 4 chairs that are patiently waiting to be recovered.

Kitchen BEFORE

Kitchen DURING

I am currently doing a RE-Refresh if you will. I spent countless hours removing that wallpaper (5 layers total!!), priming and painting the cabinets and walls to give it a fresher, lighter feel. It is definitely a happy place, but it doesn’t fit my overall vibe that I want for the house, so it’s getting refreshed again. I’m adding built in storage and the bottom cabinets will eventually be painted gray. I removed the old backsplash and replaced it with a cute white and black one. 

First floor bathroom BEFORE

First floor bathroom DURING

I removed all of the wallpaper and painted the room in Benjamin Moore Wickham Gray. We recently replaced the vanity and faucet, which means the floor is next.


Son’s bedroom DURING

Another room that isn’t finished. Are you sensing a trend? This room was painted in Behr Billards, which is such an amazing color. It’s a cozy space for a tween boy.


Back deck off of sunroom BEFORE


We tore down the old one, because frankly it was dangerous. It was replaced by the biggest deck known to man that we built with our own hands. It still needs railing and to be stained. We love this area so much in the summer. We added an above ground pool that gets used nearly every day between May and September. This was taken on a day after a storm hit.

The treehouse

We mostly finished the treehouse this spring. When your house is surrounded by woods, a treehouse is a must. I wish I could say that my kids use it all the time, but sadly they do not. Maybe we should make the wi-fi work out there or something.

Second Floor

Upstairs Hallway BEFORE

Upstairs DURING

I’ve removed wallpaper and that’s it. Everything needs to be painted. The stairwell is going to be a pain to do, so I keep putting it off.

Master bedroom BEFORE

Daughter’s room AFTER

More wallpaper removal and lots of paint. I made built-in bookshelves and window seat, plus a desk. It’s never this clean anymore, but it’s the perfect space for a little girl to create and make messes in.

Bedroom BEFORE

Master bedroom AFTER

We made this bedroom the master bedroom, because it’s a bit larger and has this bonus closet area that is currently a mess.

The walls are painted Behr Peacock Tail and Benjamin Moore Wickham Gray.

Second Floor Bathroom BEFORE

Second Floor Bathroom DURING

We removed even MORE wallpaper and painted some more. I wanted to plank the walls, but was talked out of it because we want to change the vanity eventually. I painted the area white that I would have planked and the top part Behr Peacock Tail. The vanity was painted white, as was the laminate counter. I paint pretty much everything that I can. The floor is next (sneak peek)!

The Basement

Basement BEFORE

Basement AFTER

The carpet before could only be described as Poodle. It was ripped out and this room stayed empty for about 6 months while we took care of some water issues. The floor was replaced with vinyl tile to withstand any moisture that might occur. This room is very multipurpose and gets a ton of use. The couch is super comfy and it stays in bed formation pretty much all the time for really comfy TV time. The desk gets used for minecraft or something. It’s ugly, but it serves it’s purpose. The room also serves as my home gym. I’m pretty much the only one who uses the treadmill, but I love it. I bought it used from craigslist and my husband hated me for a few days because it weighs 500 pounds. Worth it.

The wood burning stove is so amazing during the winter. It used to have pink tile, but we tore it out and replaced it. We’re still looking for a metal piece to cover insulation on it.

The other half of the basement is too ugly to show. It used to have a bathroom in it. It’s currently filled with junk, a hole in the ground (from the bathroom) and the laundry area. It’s also where I work on my dollhouse. It will eventually be lovely as well. Just not any time soon.

Emy is a vintage obsessed mama of 2 DIYer who loves sharing affordable solutions for common home problems. You don’t need a giant budget to create a lovely home. Read more…

Understanding Tesla Charging Stations: Types, Costs, And More

Understanding Tesla Charging Stations

Before we discuss the costs associated with Tesla charging, it’s essential to understand the different types of charging stations available for Tesla owners. There are two primary types of charging stations that Tesla owners can use:

Tesla Superchargers

Tesla Superchargers are high-speed charging stations specifically for Tesla EVs. They are strategically located near popular travel routes and amenities, such as restaurants, shopping centers, and hotels, making them convenient for long-distance travel.

Public Charging Stations

Are Tesla Charging Stations Free?

Tesla Supercharger Costs

Tesla Superchargers are not free, and the cost of using these stations varies depending on your location and the specific Supercharger station you’re using. The cost is typically based on the amount of electricity you use (measured in kilowatt-hours or kWh) or the amount of time you spend charging. In the United States, the average cost per kWh for Supercharging is $0.28, but this can vary significantly between states.

Public Charging Station Costs

The cost of using public charging stations also varies depending on the provider, location, and type of charger. Some public charging stations are free to use, while others require a fee for their services. The cost structure for public charging stations may also differ, with some charging per kWh and others charging per minute.

Free Charging for Tesla: Exceptions and Incentives

Although the majority of Tesla charging stations are not free, there are some exceptions and incentives that can help you save on charging costs.

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Free Supercharging Credits

Tesla offers free Supercharging credits as part of various promotions and referral programs. If you purchase a new Tesla vehicle through a referral link, you may be eligible to receive a certain amount of free Supercharging credits. Keep an eye on their website and social media channels for the latest promotions and offers.

Tesla Destination Charging

Tesla has also partnered with various hotels, restaurants, and other businesses to provide Tesla Destination Charging. These charging stations are usually Level 2 chargers, which are slower than Superchargers but still provide a convenient way to charge your Tesla while you’re away from home. While some Destination Charging locations are free, others may require a fee or only be accessible to customers of the partnering business.

Free Public Charging Stations

As mentioned earlier, some public charging stations are free to use for all electric vehicles, including Teslas. These free charging stations can be found in various locations, such as shopping centers, parking lots, and government facilities.

How to Find Free Charging Stations for Your Tesla

Finding free charging stations for your Tesla may require some research and planning, but there are several resources available to help you locate them.

Tesla’s Built-in Navigation System

Tesla’s built-in navigation system can help you find nearby charging stations, including Superchargers, Destination Charging locations, and public charging stations. You can filter the results based on the type of charger, cost, and availability.


PlugShare is a popular app and website that allows users to find and share information about charging stations worldwide. You can filter the results to show only free charging stations and even read reviews from other users about their experiences at each location.


ChargePoint is another popular app and website that helps users find charging stations for their electric vehicles. While not all stations listed on ChargePoint are free, you can filter the results to show only free locations.

Local Government Websites

Some local governments provide information about free charging stations on their websites or through dedicated apps. Check your local government website for details about free charging stations in your area.

Tips for Saving on Charging Costs

While free charging stations  are relatively rare, there are several strategies you can use to save on charging costs.

Charge at Off-Peak Times

Charge at Home

Charging your Tesla at home is often the most convenient and cost-effective option, especially if you have access to off-peak electricity rates. Investing in a Level 2 home charging station can also help you charge your Tesla faster and more efficiently.

Plan Your Trips

Take Advantage of Incentives and Promotions

Keep an eye out for Tesla promotions and incentives that offer free Supercharging credits or discounted charging rates. You can also check with your local utility company for potential EV charging discounts or rebates.

The Future of Tesla Charging

As electric vehicle adoption continues to grow, it’s likely that the availability and accessibility of charging stations will also increase. Tesla is continuously expanding its Supercharger network, and other companies are investing in public charging infrastructure to meet the growing demand.


Remember to always keep an eye on the latest promotions, incentives, and charging station developments. This will ensure you’re getting the best deal possible on your Tesla charging needs. Happy charging!

Internal Rate Of Return (Irr)

Internal Rate of Return (IRR)

An Analyst’s Guide to IRR

Written by

Tim Vipond

Published February 27, 2023

Updated July 7, 2023

What is the Internal Rate of Return (IRR)?

The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment. In the example below, an initial investment of $50 has a 22% IRR. That is equal to earning a 22% compound annual growth rate.

When calculating IRR, expected cash flows for a project or investment are given and the NPV equals zero. Put another way, the initial cash investment for the beginning period will be equal to the present value of the future cash flows of that investment. (Cost paid = present value of future cash flows, and hence, the net present value = 0).

Once the internal rate of return is determined, it is typically compared to a company’s hurdle rate or cost of capital. If the IRR is greater than or equal to the cost of capital, the company would accept the project as a good investment. (That is, of course, assuming this is the sole basis for the decision.

In reality, there are many other quantitative and qualitative factors that are considered in an investment decision.) If the IRR is lower than the hurdle rate, then it would be rejected.

What is the IRR Formula?

The IRR formula is as follows: 

Calculating the internal rate of return can be done in three ways:

Using a financial calculator

Using an iterative process where the analyst tries different discount rates until the NPV equals zero (Goal Seek in Excel can be used to do this)

Practical Example

Here is an example of how to calculate the Internal Rate of Return.

A company is deciding whether to purchase new equipment that costs $500,000. Management estimates the life of the new asset to be four years and expects it to generate an additional $160,000 of annual profits. In the fifth year, the company plans to sell the equipment for its salvage value of $50,000.

Meanwhile, another similar investment option can generate a 10% return. This is higher than the company’s current hurdle rate of 8%. The goal is to make sure the company is making the best use of its cash.

To make a decision, the IRR for investing in the new equipment is calculated below.

Excel was used to calculate the IRR of 13%, using the function, =IRR(). From a financial standpoint, the company should make the purchase because the IRR is both greater than the hurdle rate and the IRR for the alternative investment.

What is the Internal Rate of Return Used For?

Companies take on various projects to increase their revenues or cut down costs. A great new business idea may require, for example, investing in the development of a new product.

In capital budgeting, senior leaders like to know the estimated return on such investments. The internal rate of return is one method that allows them to compare and rank projects based on their projected yield. The investment with the highest internal rate of return is usually preferred.

Internal Rate of Return is widely used in analyzing investments for private equity and venture capital, which involves multiple cash investments over the life of a business and a cash flow at the end through an IPO or sale of the business.

Thorough investment analysis requires an analyst to examine both the net present value (NPV) and the internal rate of return, along with other indicators, such as the payback period, in order to select the right investment.  Since it’s possible for a very small investment to have a very high rate of return, investors and managers sometimes choose a lower percentage return but higher absolute dollar value opportunity.

Also, it’s important to have a good understanding of your own risk tolerance, a company’s investment needs, risk aversion, and other available options.

Video Explanation of Internal Rate of Return (IRR)

Below is a short video explanation with an example of how to use the XIRR function in Excel to calculate the internal rate of return of an investment. The demonstration shows how the IRR is equal to the compound annual growth rate (CAGR).

What IRR Really Means (Another Example)

Let’s look at an example of a financial model in Excel to see what the internal rate of return number really means.

If an investor paid $463,846 (which is the negative cash flow shown in cell C178) for a series of positive cash flows as shown in cells D178 to J178, the IRR they would receive is 10%. This means the net present value of all these cash flows (including the negative outflow) is zero and that only the 10% rate of return is earned.

If the investors paid less than $463,846 for all same additional cash flows, then their IRR would be higher than 10%. Conversely, if they paid more than $463,846, then their IRR would be lower than 10%.

The above screenshot is from CFI’s M&A Modeling Course.

Unlike net present value, the internal rate of return doesn’t give you the return on the initial investment in terms of real dollars. For example, knowing an IRR of 30% alone doesn’t tell you if it’s 30% of $10,000 or 30% of $1,000,000.

Using IRR exclusively can lead you to make poor investment decisions, especially if comparing two projects with different durations.

Let’s say a company’s hurdle rate is 12%, and one-year project A has an IRR of 25%, whereas five-year project B has an IRR of 15%. If the decision is solely based on IRR, this will lead to unwisely choosing project A over B.

Another very important point about the internal rate of return is that it assumes all positive cash flows of a project will be reinvested at the same rate as the project, instead of the company’s cost of capital. Therefore, the internal rate of return may not accurately reflect the profitability and cost of a project.

A smart financial analyst will alternatively use the modified internal rate of return (MIRR) to arrive at a more accurate measure.

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