How to Calculate Internal Rate of Return (IRR) in Excel
The internal rate of return (IRR) is a measure of the profitability of an investment, and it represents the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate of return that an investor expects to earn on an investment over a specific period of time.
To calculate the IRR in Excel, you will need to have a list of the expected cash flows for the investment, including the initial investment and all future cash inflows and outflows. You will also need to specify a guess for the IRR, which will be used as a starting point for the calculation.
Here is the general formula for calculating the IRR in Excel:
=IRR(values, [guess])
“Values” is the range of cells that contain the cash flows for the investment, and “guess” is an optional argument that represents your initial guess for the IRR. If you do not specify a guess, Excel will use a default value of 0.1 (10%).
For example, suppose you have a list of cash flows for an investment in cells A2 through A6, and you want to calculate the IRR. The formula would be:
=IRR(A2:A6)
If you want to specify a guess for the IRR, you can include it as an argument in the formula. For example, if you want to use a guess of 20%, the formula would be:
=IRR(A2:A6, 0.2)
Excel will then use the specified guess as a starting point and iterate through different values until it finds the IRR that makes the NPV of the investment equal to zero. The result will be displayed as a percentage.
Keep in mind that the IRR calculation is based on the assumption that all cash flows are reinvested at the IRR, so it may not always be an accurate measure of the actual return on an investment. It is also important to note that the IRR is sensitive to the order of the cash flows, and the result may be different depending on whether the initial investment is a positive or negative cash flow.
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