Microsoft Office Tutorials and References

In Depth Information

**An Example Using the IRR function**

An Example Using the IRR function

On the IRR sheet of the Chapter 29 Excel file, you will find a number of projects. See

Figure 29.5. It is clear that Project 4 will yield a negative IRR. Future cash flows are

lower than the initial investment. Unlike the Excel NPV function, the Excel IRR will

include the initial investment (the negative cash flow of time 1) as part of the function.

As you can see in Figure 29.6, I calculated the IRR for Project 1 and included the

initial cash flow of time 0. The resulting IRR is 8.21 percent. I did not enter a value in

the Guess cell. Excel uses the default value of 10 percent for Guess if you do not include it.

In Figure 29.7, I have the rest of the IRR calculations for the other projects. As

expected, Project 4 yields a negative IRR.

Based on the IRR

—

you should be choosing Project 2 with the highest IRR.

FIGURE 29.5
An IRR Example

FIGURE 29.6
The IRR Function Menu

FIGURE 29.7
Calculated IRRs