📌 Part 1: Introduce
📚 Definition
The IRR (Internal Rate of Return) function in Microsoft Excel calculates the internal rate of return for a series of cash flows.
🎯 Purpose
The function is handy for evaluating the profitability of investments, where cash flows can be both incoming (positive values) and outgoing (negative values).
📝 Syntax & Arguments
The syntax for the IRR function is as follows:
=IRR(values, [guess])
🤔 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.
📊 Return Value
The function returns the internal rate of return as a percentage.
💡 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.
📌 Part 2: Examples
📈 Example 1: Calculating IRR for a New Business Venture
🎯 Purpose of Example
To calculate the IRR for a new business venture for 3 years.
📊 Data Sheet and Formulas
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Year | IRR | ||
| 2 | 1 | Year 1 | -10000 | |
| 3 | 2 | Year 2 | 4000 | |
| 4 | 3 | Year 3 | 5000 | |
| 5 | =IRR(C2:C4) | |||
| 6 | 12.2% |
📝 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%.
📈 Example 2: Evaluating Two Different Projects
🎯 Purpose of Example
To compare the IRR of two projects to decide which is more profitable.
📊 Data Sheet and Formulas
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Project | IRR | ||
| 2 | 1 | Project A | -15000 | |
| 3 | 2 | Project A | 6000 | |
| 4 | 3 | Project A | 7000 | |
| 5 | =IRR(C2:C4) | |||
| 6 | 15.3% |
📝 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%.
📈 Example 3: IRR for a Real Estate Investment
🎯 Purpose of Example
To calculate the IRR for a real estate investment over 3 years.
📊 Data Sheet and Formulas
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Real Estate | IRR | ||
| 2 | 1 | Year 1 | -20000 | |
| 3 | 2 | Year 2 | 8000 | |
| 4 | 3 | Year 3 | 10000 | |
| 5 | =IRR(C2:C4) | |||
| 6 | 18.0% |
📝 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.
📈 Example 4: IRR for a Stock Portfolio
🎯 Purpose of Example
To calculate the IRR for a stock portfolio over 3 years.
📊 Data Sheet and Formulas
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Stocks | IRR | ||
| 2 | 1 | Year 1 | -5000 | |
| 3 | 2 | Year 2 | 2000 | |
| 4 | 3 | Year 3 | 3000 | |
| 5 | =IRR(C2:C4) | |||
| 6 | 16.5% |
📝 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.
📈 Example 5: IRR for a Startup Investment
🎯 Purpose of Example
To calculate the IRR for a startup investment over 3 years.
📊 Data Sheet and Formulas
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Startup | IRR | ||
| 2 | 1 | Year 1 | -100000 | |
| 3 | 2 | Year 2 | 40000 | |
| 4 | 3 | Year 3 | 70000 | |
| 5 | =IRR(C2:C4) | |||
| 6 | 20.1% |
📝 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.
📌 Part 3: Tips and Tricks
- 🌟 Start with a Good Guess: If you’re getting
#NUM!errors, try providing a guess value to help Excel find the IRR. - 🛠️ Check Cash Flows: Ensure you have at least one positive and one negative cash flow for the function.
- ⏰ Regular Intervals: For accurate calculations, cash flows should occur at regular intervals.