This Excel tutorial explains how to use Excel IRR Function to calculate Internal Rate of Return.

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Excel NPV Function to calculate Net Present Value

## Internal Rate of Return

Internal Rate of Return (IRR) is the discount rate of cash flow at which an investment breaks even. Similar to Net Present Value (NPV), which discounts a series of cash flow back to present value.

For example, an initial investment is $10000, at the end of 1st year, the cash flow received is $1000, the 2nd year is $2000.

Year | Cash Flow |

0 | -10000 |

1 | 8000 |

2 | 10000 |

The net present value = -10000 + 8000/(1+IRR) + 10000/(1+IRR)^{2}

We have to assume an IRR to calculate the net present value.

If we assume the net present value = 0, then we calculate IRR.

0 = -10000 + 8000/(1+IRR) + 10000/(1+IRR)^{2}

IRR = 0.477

## Excel IRR Function to calculate Internal Rate of Return

It is very difficult to calculate IRR without using financial calculator or computer. Excel has a function called IRR that you can use.

#### Syntax of Excel IRR Function

IRR(values, [guess])

values | Cash flow that contain at least one positive value and one negative value to calculate the internal rate of return. |

guess | Optional. A number that you guess is close to the result of IRR. If Excel fails to find a result after 20 tries, the #NUM! error value is returned. |

#### Example of Excel IRR Function