Microsoft Office Tutorials and References

In Depth Information

**IRR—Internal Rate of Return**

If you drag the results to the right or copy and paste the function, Excel will

calculate the NPV for the three projects. As you can see in Figure 29.3, project 3 has

the highest NPV.

You have to add the initial (negative) investment to the NPV function to get the

real NPV, Net Present Value, results as shown in Figure 29.4.

If you had to choose one investment/project, based on the Net Present Value,

your choice would be Project 3 with the highest NPV.

IRRâ€”INTERNAL RATE OF RETURN

Internal rate of return is the discount rate that makes the present value of the future

cash flows of an investment equal the cost of the investment. In other words, the

objective is to find the discount rate which will make NPV equal to zero.

The IRR is calculated by a trial and error process starting with a guess rate.

After a number of iterations, Excel finds the rate which makes the NPV equal

to zero.

FIGURE 29.3
NPV for the Three Projects

FIGURE 29.4
Add the Initial (Negative) Investment