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Calculating IRR in Excel

This worksheet demonstrates examples of using an Excel function to find the internal rate of return (IRR). IRR is the internal rate of return of a cash flow stream associated with an investment. The IRR formula [=IRR(values,guess)] consists of two fields. Values is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return. Guess is a number that you guess is close to the result of IRR. IRR is the internal rate of return for a series of cash flows represented by the numbers in values. These cash flows do not have to be even, as they would be for an annuity. However, the cash flows must occur at regular intervals, such as monthly or annually. IRR is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods. The "Values" field must contain at least one positive value and one negative value in order to calculate IRR. If there is no cash flow for an individual period within the investment duration, it must be represented as zero. IRR will return a periodic interest rate which may need to be annualized in order to compare to the cost of capital in making investment decisions. This example assumes an estimated cost of $70,000 for beginning a business, and income of $12,000, $15,000, $18,000, $21,000, and $26,000 in the five years that follow. Follow these steps to use Excel's IRR function to find the internal rate of return for this investment: 1) Select the output cell for the solution. (For this example, use cell J34.) 2) Click the function button (fx ), select All in the left pane to display all Excel functions, and doubleclick IRR in the right pane. Note: When you click on IRR, the formula is shown at the bottom of the Paste Function dialog box: =IRR(values,guess). 3) The cursor automatically appears in the "Values" field, prompting you for the required data. To select the data range for this calculation, select the fields (click and drag) that constitute your data range. This data range appears in the "values" field. (For this example, the range is J28:J33.) The formula bar should now contain the formula: =IRR(J28:J33). 4) Leave the "Guess" field blank. 5) After you have entered the required data, click OK. Excel displays the result in the output cell. The result for this example is 8.66%, which indicates the expected return on the $70,000 initial investment after five years. Copyright 2001 LLC. All rights reserved. -70000 12000 15000 18000 21000 26000