What Is The Internal Rate of Return (IRR)?
The Internal Rate of Return, also called the IRR, is rooted in finance. Managers and analysts often use it while making important financial decisions. The Internal Rate of Return (IRR) is the discount rate at which the current value of any project’s future cash flows equals zero. Typically, it is the rate of interest at which a firm borrows money for a project.
Moreover, financial experts also use the Internal Rate of Return to evaluate the profits from various ventures and make vital investment decisions. While this rate can be calculated manually, doing so doesn’t yield exact results.
If you want to calculate the exact IRR, you would either have to use Excel or a financial calculator. This blog covers some simple steps on how to calculate the Internal Rate of Return.
How to Calculate The Internal Rate Of Return (IRR) In Excel?
Let’s learn how to calculate the IRR using the example below.
The data table above depicts negative and positive cash flow values. The negative value shows the initial investment, and the following values depict the positive cash flows the project will generate in the upcoming years.
Here’s how you can calculate the Internal Rate of Return for these values:
=IRR(B2:B5, 20%*)
The percentage value is an estimation or guess of what you think the IRR would be. However, you need not worry about this guess figure, as altering it would not change the IRR value as it is an optional argument.
The IRR determined by Excel is frequently expressed as a round percentage. The reason for this could be that the decimal places are set to 0, which is why you’re seeing a rounded-up or a rounded-down figure.
Final Word
The internal rate of return (IRR) is common in finance and is used to determine the expected return on investments. It is critical for capital budgeting and financial modeling. You don’t have to be a financial wizard to apply this mathematical calculation.
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