Microsoft Office Tutorials and References
In Depth Information
Measuring Your Internals
Figure 6-5:
Comparing
business
opportunities.
This is how to use the IRR function:
1. Enter a series of cash flow values:
•Moneypaidout,suchastheinitialinvestment,asanegative
value
•Moneycomingin,suchasrevenue,asapositivevalue
2. Enter =IRR( to begin the function entry.
3. Drag the cursor over the range of cells containing the cash flows, or
enter the range address.
4. Optionally, enter a guess to help the function.
To do this, enter a comma ( ,) and then enter a decimal value to be used
as a percentage (such as .2 for 20 percent). You can enter a positive or
negative value.
5. Type a ), and press Enter.
Considering that IRR is based on cash flows, in and out, it’s prudent to
include paying yourself, as well as accounting for investments back in the
business. Salary is a cash flow out; investment is a cash flow in.
Figure 6-6 expands on the video-taping business with a detailed example. As
a business, there are various cash flows in and out — investment, utility
payments, fees to the accountant and lawyer, advertising, salary, and so on.
The Internal Rate of Return for the first three months of the business is
displayed in cell E1. The formula is =IRR(B4:B25,-0.2). By the way, this one
needed a guess to return the answer. The guess is –0.2. The internal rate or
return is –6 percent. The video-taping business is not a moneymaker after a
few months, but this is true of many startups.
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