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.
IRR—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
FIGURE 29.3 NPV for the Three Projects
FIGURE 29.4 Add the Initial (Negative) Investment