Microsoft Office Tutorials and References
In Depth Information
Irregular Cash Flows
Figure 12-17: Accumulating balance approach for multiple IRRs.
The series of flows then becomes the change in the balances, rather than the original given cash
flows. The internal rate of return on these balanced-derived flows is zero, or very close to zero.
I’ve already taken into account all the financing and reinvesting necessary for the project, and the
resulting interest and return are shown in the flows. The Risk Rate Equivalent IRR may be
compared with a different rate such as the Risk Free Rate of Return (traditionally 90-day Treasury
bills) to determine the relative risk of the project.
But what does this all mean? If you pay 9% on negative balances, this project returns an 8.579%
rate to you on positive balances. The name “Risk Rate Equivalent IRR” refers to the fact that it
determines how the project compares with the return on money invested in a bank or 90-day
Treasury bills.
There is no requirement that the finance rate be fixed. A bank may do calculations in the same way
but fix the deposit rate and allow the Goal Seek feature to calculate the equivalent lending rate.
Irregular Cash Flows
All the functions discussed so far — NPV, IRR, and MIRR — deal with cash flows that are regular.
That is, they occur monthly, quarterly, yearly, or at some other periodic interval. Excel provides
two functions for dealing with cash flows that don’t occur regularly: XNPV and XIRR.
Net present value
The syntax for XNPV is
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