Excel allows a user to get an internal rate of return of an investment using the IRR function. This step by step tutorial will assist all levels of Excel users in getting an IRR of an investment.
Figure 1. The result of the IRR function
Syntax of the IRR Formula
The generic formula for the IRR function is:
=IRR (values, [guess])
The parameter of the IRR function is:
- values – a range of cells containing values, including initial investment and incomes. The investment must have negative sign, as it is a cost
- [guess] – an estimated value for the expected IRR. This parameter is non-mandatory. If it’s omitted, the function will take a default value of 0.1 (=10%).
Setting up Our Data for the IRR Function
Let’s look at the structure of the data we will use. In column B (“Amount”), we have values including initial investment and yearly incomes. In column C (“Description”) we have description of every amount. In the cell E3, we want to get the IRR.
Figure 2. Data that we will use in the IRR example
Get an IRR of Values Using the IRR Function
In our example, we want to get the IRR of the values in the range B3:B10. The result will be in the cell E3.
The formula looks like:
The parameter values is the range B3:B10
To apply the IRR function, we need to follow these steps:
- Select cell E3 and click on it
- Insert the formula:
- Press enter.
Figure 3. Using the IRR function to get the internal rate of the investment
Finally, the result in the cell E3 is 5%, which is the internal rate of the investment.
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