What is IRR or Internal Rate of Return Formula in excel? IRR Meaning

  • IRR or Internal rate of return is the expected rate of return on an investment or project. The rate of interest at which future cash flows are discounted so that NPV of those cash flows is zero. It is also referred to as Discounted cash flow rate of return.
    This is normally useful while comparing one investment with other. For calculating IRR:

    1. You are provided the expected cash flows of a project/investment
    2. NPV = O (zero)
    3. Initial cash investment= Present Value of Future Cash Flows for that investment i.e. Cost paid= PV of future cash flows. Hence, the NPV= 0

    There is an easy way, not getting into too much details, here's IRR or Internal rate of return formula in excel:

    Just click on the Formula bar > Financial > IRR

    A pop-up window will open where you need to fill following details:

    1. Values i.e. a reference to the cells for which you wish to calculate IRR and
    2. Guess i.e. a number close to the IRR result. If not given, it is assumed to be 10% only.

    The result shall be displayed immediately.

    After calculating IRR or Internal rate of return, it is compared to company's cost of capital.

    • If IRR>=Cost of capital: the company shall prefer to accept the project.
    • If IRR< Cost of capital: the company shall not accept it.

  • @harleen IRR function in excel has made it quite easy to calculate Internal rate of return. Just give the required range and details, there you go. We can grab a quick answer and avoid doing lengthy calculations on our own. I remember how we used to learn the formula and actually calculate it. Thanks to MS Excel and this fintech world for making complicated things simpler.

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