Whenever a business is willing to invest in a project, it makes sure if it is a profitable investment or not. Let us say project A has 10% IRR whereas Project B has 12% IRR. A business would always invest in a project that has more IRR i.e Project B. In Financial Analysis, IRR is important to understand before investing in any project. In this tutorial, we would cover the function called the IFF formula to find the internal rate of return in excel.
Here we go 😎
When to Use IRR Function of Excel
The word IRR represents the “Internal Rate of Return”. The IRR formula in excel calculates the internal rate of return (IRR) for an initial investment. IRR refers to that rate of return where the present value of the series of cash flows equals the initial investment amount. It is that value where the NPV is zero. This function helps us to compare between different investments or projects.
IRR Function comes in the category of Financial Functions of Excel.
Syntax and Arguments
=IRR(values,[guess])
The below points contain a description of function arguments for the IRR Formula.
- values – This is the investment and a series of cash flows after investing money. The first value would specify the initial investment while the next values would specify the cash flow after 1 year, 2 years and so on.
- [guess] – This is an optional function argument. The [guess] is our guess about the IRR. If we do not specify the guess, Function assumes it as 0.10 or 10%.
Must to Know Points About IRR Function of Excel
The following points about IRR Function should be kept in mind before using the actual Function.
- IRR is the percentage of Discount rate making the net present value zero.
- Initial Investment is negative as it the cash outflow. After which, the cash flows will either be negative or positive depending on the outflow or inflow of cash.
- The Future cash inflows will have less value at present. In other words, we can say that $1000 in 2023 would not be worth same as $1000 in 2021. The future cash is discounted at a rate to get its present value. The percentage is called as Discount rate.
- Net present value is the sum of negative investment and present value of positive/negative cash flows in the coming years.
- The input parameter must contain at least one negative and one positive value to get the result of IRR Function or else it returns a #NUM! error.
- Any text, logical value, empty cells will be ignored when passed as the function arguments.
- The NPV and IRR both play an important role in comparing the Projects for investing money. A positive NPV would mean that the rate of return is more than the discount rate.