Excel Function - IRR

Used to calculate the Internal Rate of Return for a series of periodic cash flows.

Closely related to Excel Function - NPV.

=IRR(values, [guess])

Where:

• values: an array or range of cash flows (including both the undiscounted initial investment and all future returns)
• guess: your estimated starting value for the IRR. Does not change the result, just makes computation easier.

IMPORTANT Unlike NPV, the IRR function must include the initial investment (today’s cash flow) in the list of values, since it uses all cash flows to solve for the rate that sets $NPV=0$.

Example

Suppose you invest -$1000today,andexpecttoreceive$400, $500,and$600 over the next three years:

=IRR({-1000, 400, 500, 600})

This would yield $13.9\%$ which means this project grows at an equivalent annual rate of $13.9\%$ when accounting for all inflows and outflows.