'IRR explained simply with basic analogies for kids, grandkids & newbies'

Hi friends...after the weekend I realised that if sophisticated investors are also wrangling with fully grasping IRR then I needed to simplify it right down...then Scott said, 'Simplicity is the ultimate sophistication' so that gave me the courage to share this VERY SIMPLE example which really helped me.

Most of us were taught IRR backwards — through jargon, formulas, and technical explanations, instead of everyday intuition.

We hear words like *discount rate*, *net present value*, *capital efficiency*, *time-weighted returns*… and it feels like trying to grab smoke.

But here’s the truth:

💡 **IRR isn’t actually a complex concept — it’s a simple idea that’s been explained in a complicated way.**

So I started breaking it down using simple everyday analogies — not to patronise anyone, but to finally make it click.

And I want to share that with you here.

🍋 The Lemonade Stand Analogy (surprisingly powerful)

Imagine you spend £20 today to set up a lemonade stand.

Then over the next three weeks you receive:

Week 1 **£10**

Week 2 **£10**

Week 3 **£10**

Forget “profit” for a moment. IRR doesn’t look at profit.

It looks at **cash coming back**.

That’s it.

IRR asks:

“How fast did my £20 *return to me*, and how quickly did it start growing beyond that?”

It’s simply a speedometer for money.

* You get half your money back in the first week

* All your money back in the second week

* And profit begins in the third

That makes the IRR surprisingly high — not because this is an amazing business, but because the cash comes back quickly.

And that’s exactly what IRR measures.

🍦Now swap lemonade for an ice cream truck…

* Initial cost: **Money out**

* Weekly sales: **Money in**

* Timing: **Early money counts more than late money**

Suddenly the same IRR logic applies.

🏢 And now swap lemonade for a property syndication deal…

* Acquisition cost = **initial cash out**

* Rental income = **cash inflow**

* Operating expenses = **cash out**

* Refinancing / sale / distributions = **cash in**

Again…it’s the same lemonade stand, just with more zeros.

IRR still asks the same question:

“How quickly does this deal return my money — and how efficiently does it grow it?”

It’s not mysterious.

It’s just timing.

🙌 **Why I’m sharing this**

Because I realised many investors feel embarrassed to ask for the “simple explanation,” especially when they’ve already reached a high level.

We all learn better when the fog lifts.

Once the idea clicks in everyday language, the sophisticated version suddenly makes perfect sense.

And honestly — whether it’s:

* a lemonade stand

* an ice cream truck

* a rental property

* a medical building

* or a private equity deal…

The underlying cash-flow logic is identical.

The complexity is just scale.

💬 *If anyone wants the little IRR “watch it change” calculator I made, just shout — it’s been a game changer for Kai and I in helping us see IRR as a living, breathing thing rather than a static number.*

Happy to share it with anyone who wants to play with the variables. It really makes the concept come alive.

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