When you need to calculate an internal rate of return for set of values, you will need to use the IRR Excel formula. IRR can be defined as the interest rate that is accrued on a particular investment that consists of income and payments that reoccur at regular intervals. With this particular formula you will enter income as a positive value and the payments you make as a negative value.
A good example of why you might need to use the IRR Excel formula might be this: you decide to enter into an agreement to invest in a particular business; the business owner agrees to make payments to you to return the amount you invested for the next four years. Your investment is to be $100,000, for which you expect to be repaid $10,000 in the first year, $20,000 in year 2, $30,000 in year 3 and the final $40,000 in the fourth and final year.
As the $100,000 is the money you are lending out, this amount is entered into Excel as a negative figure and all other figures are entered as positives. On your spreadsheet this could be entered as cell A1 -100,000, A2 10,000, A3 20,000, A4 30,000 and A5 40,000. Once these are entered you will need to use the IRR Excel formula: =IRR (A1:A5) to calculate your internal rate of return.
All ranges you plan to use with the IRR formula have to include at least one payment and one receipt. Should you happen to get a #NUM error after you have included the preceding information, it means that Excel needs more information to proceed with the IRR calculation. What you are providing Excel with a starting point or guess to work with. This can be represented as: =IRR A1:A5, -5%), wherein Excel will begin calculating the IRR at -5% and then continue to attempt to resolve the IRR based on the information that is included in the range.
If using the IRR Excel formula still seems to be a little confusing and you are still not getting the results you need, you will find that there are plenty of tutorials available online that can help you learn how to use this particular formula. You will also find that there are easy to follow instructions on the spreadsheet itself to ensure that you can create the necessary formulas for this and many other functions that will make working with spreadsheets far simpler.
