How to Use Excel's IRR Function

By Techwalla Computers Editor

According to AMP Capital Investors, an investment's internal rate of return is "calculated to show the rate at which the present value of future cash flows from an investment is equal to the cost of the investment." One way you can perform this calculation is through Microsoft Excel's IRR formula.

Step 1

Know what the IRR function does. IRR returns the internal rate of return for a series of cash flows input by the user. Cash flows must occur at regular intervals but don't have to be for the same amount at each interval.

Step 2

Follow the syntax of the IRR function, which is =IRR (values, [guess]). The parameter "values" refers to a reference or array of cells that contain the numbers on which to calculate the internal rate of return. The "[guess]" parameter is optional. It's a number that you estimate to be close to the actual rate of return. If left blank, Excel assumes 0.1 (10 percent).

Step 3

Use the IRR function. Say you want to start your own business. You think you may need $15,000 startup costs, and you predict yearly profits of $4,000, $5,000 and $12,000, respectively. Input those numbers into Excel contiguously in a row or column, such as in the range A1:A4. Remember to represent your startup costs as a negative number. To calculate your internal rate of return at the end of your third year, place your cursor in a blank cell and use the following formula: =IRR (A1:A4). Do not include a period at the end of the equation. You should get an IRR of 15 percent.