How to Do IRRs in Excel
The internal rate of return (IRR) provides the interest rate for an investment consisting of payments and income that occur at regular intervals. The payments and income, otherwise known as the cash flow, do not need to be the same from period to period, but the time between each period must be identical. The IRR allows the user to determine the best place to invest their money in order to achieve the greatest returns over time. You can use Microsoft Excel to calculate the IRR.
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Instructions
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Enter the payments and income into an Excel spreadsheet. Payments must be entered as negative numbers and income as positive numbers.
For example, type the following values into an Excel spreadsheet:
In A1 type -70,000 to indicate the initial cost of the business
In A2 type 12,000 to indicate the income for the first year
In A3 type 15,000 to indicate the income for the second year
In A4 type 18,000 to indicate the income for the third year
In A5 type 21,000 to indicate the income for the fourth year
In A6 type 26,000 to indicate the income for the fifth year
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Enter your estimation of the IRR in cell B1. This step is optional, but if you do not enter any number, Excel uses 10 percent as the default and solves for the solution. If Excel is unable to find a solution after 20 tries, it will give up and return an error value of #NUM.
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Enter the following formula into A8 to calculate the IRR:
"=IRR(A1:A6,B1)"
If the error value of #NUM is returned, change your estimation value to a higher or lower number until an answer is returned.
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