The IRR function calculates the internal rate of return of a series of cash flows, starting with a guess at the correct answer. The internal rate of return is the effective interest rate such that the net present value of the cash flow is zero. This function is the inverse of the net present value function.
You should enter the initial cash flow, initial, as a negative number to indicate that it is money received, rather than money paid out.
For example, to find the internal rate of return of a series of cash flows that start with a negative flow of $800, followed by payments of $400, $400, $200, and $100 at even intervals, use the following formula:
IRR(0.15, -800, {400, 400, 200, 100})
Ability calculates the interest rate per period and displays 0.18 or 17.9652% (depending on the percent formatting of the cell – use the Number command from the Format menu to change it).
In this example, the result shows that if you borrow $800 and make annual payments of $400, $400, $200 and $100, the underlying interest rate charged to you would be 17.9652%.
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