IRR

Description: Returns the interest rate of return for a series of cash flows represented by numbers in the form of 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. The internal rate of return is the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular periods.

Syntax: IRR(Values, [Guess])

Values is an array or a reference to cells that contain numbers for which you want to calculate the internal rate of return.

Values must contain at least one positive value and one negative value to calculate the internal rate of return.

IRR uses the order of Values to interpret the order of cash flows. Be sure to enter your payment and income values in the sequence you want.

If an array or reference argument contains text, logical values, or empty cells, those values are ignored.

Guess is a number that you guess is close to the result of IRR.

The software uses an iterative technique for calculating IRR. Starting with Guess, IRR cycles through the calculation until the result is accurate within 0.00001 percent. If IRR can't find a result that works after 100 tries, the #NUM! error value is returned.

In most cases you do not need to provide Guess for the IRR calculation. If Guess is omitted, it is assumed to be 0.1 (10 percent).

If IRR gives the #NUM! error value, or if the result is not close to what you expected, try again with a different value for Guess.

Remarks:

IRR is closely related to NPV, the net present value function. The rate of return calculated by IRR is the interest rate corresponding to a 0 (zero) net present value. The following formula demonstrates how NPV and IRR are related:

NPV(IRR(B1:B6),B1:B6) = 3.60E-08
[Within the accuracy of the IRR calculation, the value 3.60E-08 is effectively 0 (zero).]

Example:

Suppose you want to start a restaurant business. You estimate it will cost $70,000 to start the business and expect to net the following income in the first five years: $12,000, $15,000, $18,000, $21,000, and $26,000. A1:A6 contain the following values: $-70,000, $12,000, $15,000, $18,000, $21,000 and $26,000, respectively.

IRR(A1:A5) = -2% (investment's internal rate of return after four years)
IRR(A1:A6) = 9% (internal rate of return after five years)
IRR(A1:A3, -10%) = -44% (to calculate the internal rate of return after two years, you need to include a guess)