In the previous post we saw ‘How to use Excel NPV Function?‘, now we will learn about Excel IRR Function.
What is IRR?
IRR stands for Internal Rate of Return. It Returns the internal rate of return for a series of cash flows represented by the numbers in 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.
It is related to the concept of net present value. IRR is the rate of discounting at which NPV = 0 i.e. the present value of all cash inflows is equal to the present value of all cash outflows.
Thus, it is expressed in percentage form. IRR is another useful tool for project analysis. If IRR for a project exceeds its cost of capital then the project is accepted else it is rejected.
The arguments for IRR function are values and guess rate.
Unlike the NPV function, all the cash flows (including the initial cash outflow) should be specified in values. The guess rate is an estimated IRR.
This is an optional argument so it may or may not be specified by the user. If it is not specified by the user, excel assumes it to be 10%.
The initial cash outflow is Rs. 2,50,000/-
Subsequent cashflows, as expected in the future, are laid down further. Type ‘=’ Insert IRR function and specify the range of values as C4 to C10, covering all the cashflows. You may specify the guess rate at, say, 11%. Then close the function and hit enter. The IRR will be computed by excel.
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