How to Calculate the Internal Rate of Return in Excel

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Internal Rate of Return (IRR) Calculator

Estimate the profitability of your investments and verify your Excel calculations.

Enter the total startup cost (positive number, we handle the logic).
Enter expected net income for each subsequent period.
Calculated Internal Rate of Return
0.00%

How to Calculate the Internal Rate of Return in Excel

The Internal Rate of Return (IRR) is a critical metric used in financial analysis to estimate the profitability of potential investments. It is the discount rate that makes the Net Present Value (NPV) of all cash flows equal to zero.

Using the Excel IRR Function

Excel makes calculating this metric straightforward using the built-in function. Here is the syntax:

=IRR(values, [guess])

Step-by-Step Guide:

  1. Prepare your data: In a single column, list your cash flows. The first value must be your initial investment (entered as a negative number). Subsequent rows should be your positive returns.
  2. Select a cell: Click the cell where you want the result to appear.
  3. Enter the formula: Type =IRR(A1:A6) (assuming your data is in cells A1 through A6).
  4. Format: Format the resulting cell as a Percentage to see the accurate rate.

Understanding the "Guess" Argument

The [guess] parameter in Excel is optional. IRR is calculated iteratively. If Excel cannot find a result after 20 tries, it returns the #NUM! error. If this happens, you can provide a guess (like 0.1 for 10%) to help the algorithm converge.

Mathematical Formula

While Excel handles the heavy lifting, the underlying logic solves for r in the following equation:

0 = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + … + CFn/(1+r)^n

Because the variable r is in the exponent, it cannot be isolated algebraically. This is why calculators and Excel use numerical methods (like the Newton-Raphson method) to approximate the answer.

Interpreting Your Results

Generally, if the IRR is higher than your cost of capital (or required rate of return), the project is considered a good investment. If the IRR is lower than the interest rate you would pay to finance the project, it may result in a net loss.

function calculateIRR() { // 1. Get Initial Outlay var initialInput = document.getElementById('initialOutlay').value; // 2. Validate Initial Outlay if (initialInput === "" || isNaN(initialInput)) { alert("Please enter a valid Initial Investment."); return; } // 3. Construct Cash Flow Array // Note: Initial outlay is cash leaving, so it must be negative in the math var flows = []; flows.push(-1 * Math.abs(parseFloat(initialInput))); var hasPositiveFlow = false; // Loop through 6 periods (matching HTML inputs) for (var i = 1; i 0) hasPositiveFlow = true; } // 4. Basic Validation for Solvability // If there is no positive cash flow, IRR calculates to -100% or fails if (!hasPositiveFlow) { displayResult("Error", "Enter at least one positive cash flow in the periods."); return; } // 5. Calculate IRR using Newton-Raphson approximation // We try to find 'r' such that NPV(r) = 0 var r = 0.1; // Initial guess: 10% var maxIter = 1000; var tolerance = 0.000001; var found = false; for (var iter = 0; iter < maxIter; iter++) { var npv = 0; var d_npv = 0; // Derivative of NPV with respect to r // NPV = Sum( C_t / (1+r)^t ) // d(NPV)/dr = Sum( -t * C_t / (1+r)^(t+1) ) for (var t = 0; t < flows.length; t++) { var denom = Math.pow(1 + r, t); var term = flows[t] / denom; npv += term; // Derivative calculation part var d_term = -t * flows[t] / Math.pow(1 + r, t + 1); d_npv += d_term; } // Newton-Raphson Step: r_new = r_old – f(r)/f'(r) if (Math.abs(d_npv) < 0.0000001) { // Derivative too close to zero, might divide by zero break; } var newRate = r – (npv / d_npv); // Check for convergence if (Math.abs(newRate – r) 0) { analysis = "This project creates a positive return on investment."; } else { analysis = "This project results in a negative return on investment."; } displayResult(percentage, analysis); } else { displayResult("Calculation Failed", "The cash flows provided do not converge to a standard IRR result. This often happens if cash flows switch signs multiple times."); } } function displayResult(mainText, subText) { var resultBox = document.getElementById('irrResult'); var valueDiv = document.getElementById('irrValue'); var analysisDiv = document.getElementById('irrAnalysis'); resultBox.style.display = "block"; if(mainText === "Error" || mainText === "Calculation Failed") { valueDiv.style.color = "#c0392b"; valueDiv.innerHTML = mainText; } else { valueDiv.style.color = "#2c3e50"; valueDiv.innerHTML = mainText; } analysisDiv.innerHTML = subText; }

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