The Microsoft Excel IRR function is categorized under Financial functions. It is used to calculate the internal rate of return for a series of cash flows, i.e., the initial capital value and the subsequent net income values. It is frequently used by businesses to estimate the profitability of potential investments.
=IRR (values, [guess])
Figure 1.Calculating internal rate of return using the IRR function
values – the range of cells that contain values.
guess – setting this parameter is optional. It is the estimated value for the expected IRR. If left blank, the function will take a default value of 0.1 (=10%).
How to use the function
IRR is the rate of interest returned for a given cash flow (payments and income occurring at regular intervals, e.g., monthly or annually). Payments are indicated with a minus (negative) sign, and net income is represented with a plus sign (positive values). Amounts can be different, but intervals need to be consistent. The first value carries a negative sign it represents the initial investment or outlay.
#NUM! Error is shown if an accurate IRR value cannot be calculated using the default guess. This error can be corrected by adjusting the guess.
The array must show that at least one payment (negative value) is made and must also show at least one net income (positive value) from the outlay to return the IRR.
The Internal Rate of Return function follows the order of the values to calculate cash flows. This makes it necessary to enter the outlay and income values sequentially.