# IRR Function in Excel

### π Part 1: Introduce

#### π Definition

The IRR (Internal Rate of Return) function in Microsoft Excel calculates the internal rate of return for a series of cash flows.

#### π― Purpose

The function is handy for evaluating the profitability of investments, where cash flows can be both incoming (positive values) and outgoing (negative values).

#### π Syntax & Arguments

The syntax for the IRR function is as follows:

syntax
`=IRR(values, [guess])`

#### π€ Explain the Arguments in the Function

• Values: This is a required argument. It is an array or a reference to cells that contain the cash flows for which you want to calculate the internal rate of return.
• Guess: This is an optional argument. It’s a number you guess is close to the result of IRR.

#### π Return Value

The function returns the internal rate of return as a percentage.

#### π‘ Remarks

The IRR function is closely related to the NPV (Net Present Value) function. If the function can’t find a result after 20 tries, it returns a `#NUM!` error.

### π Part 2: Examples

#### π Example 1: Calculating IRR for a New Business Venture

##### π― Purpose of Example

To calculate the IRR for a new business venture for 3 years.

ABCD
1YearIRR
21Year 1-10000
32Year 24000
43Year 35000
5=IRR(C2:C4)
612.2%
##### π Explanation

In this example, the initial investment is \$10,000 (a negative value because it’s an outgoing cash flow). The business is expected to generate \$4,000 in Year 2 and \$5,000 in Year 3. The IRR is calculated in cell D5, resulting in 12.2%.

#### π Example 2: Evaluating Two Different Projects

##### π― Purpose of Example

To compare the IRR of two projects to decide which is more profitable.

##### π Data Sheet and Formulas
ABCD
1ProjectIRR
21Project A-15000
32Project A6000
43Project A7000
5=IRR(C2:C4)
615.3%
##### π Explanation

In this example, Project A requires an initial investment of \$15,000 and is expected to generate \$6,000 and \$7,000 in the following years. The IRR is calculated in cell D5, and the result is 15.3%.

#### π Example 3: IRR for a Real Estate Investment

##### π― Purpose of Example

To calculate the IRR for a real estate investment over 3 years.

ABCD
1Real EstateIRR
21Year 1-20000
32Year 28000
43Year 310000
5=IRR(C2:C4)
618.0%
##### π Explanation

Here, the initial investment in real estate is \$20,000. The expected returns are \$8,000 and \$10,000 for the next two years. The IRR is 18.0%, calculated in cell D5.

#### π Example 4: IRR for a Stock Portfolio

##### π― Purpose of Example

To calculate the IRR for a stock portfolio over 3 years.

ABCD
1StocksIRR
21Year 1-5000
32Year 22000
43Year 33000
5=IRR(C2:C4)
616.5%
##### π Explanation

In this example, the initial investment in the stock portfolio is \$5,000. The portfolio is expected to generate \$2,000 and \$3,000 in the following years. The IRR is 16.5%, calculated in cell D5.

#### π Example 5: IRR for a Startup Investment

##### π― Purpose of Example

To calculate the IRR for a startup investment over 3 years.

ABCD
1StartupIRR
21Year 1-100000
32Year 240000
43Year 370000
5=IRR(C2:C4)
620.1%
##### π Explanation

Here, the initial investment in the startup is \$100,000. The expected returns are \$40,000 and \$70,000 for the next two years. The IRR is 20.1%, calculated in cell D5.

### π Part 3: Tips and Tricks

1. π Start with a Good Guess: If you’re getting `#NUM!` errors, try providing a guess value to help Excel find the IRR.
2. π οΈ Check Cash Flows: Ensure you have at least one positive and one negative cash flow for the function.
3. β° Regular Intervals: For accurate calculations, cash flows should occur at regular intervals.