Rate of return with IRR
PremiumIn E1, work out the project's internal rate of return with IRR. Give it every cash flow, starting with the year 0 investment.
| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| 1 | Year | Cash flow | Rate of return | |||
| 2 | 0 | -10000 | ||||
| 3 | 1 | 3000 | ||||
| 4 | 2 | 4000 | ||||
| 5 | 3 | 4000 | ||||
| 6 | 4 | 3000 | ||||
| 7 | ||||||
| 8 |
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Why this works
IRR finds the discount rate at which the project's NPV is exactly zero. Here that's about 0.149, or 14.9% a year. Compare it with what the money would earn elsewhere: at an 8% cost of capital the project is worth doing, which matches the positive NPV from the last lesson.
Common mistake: Leaving out the year 0 investment. With only money coming in IRR has no answer and returns #NUM!.
The answer
- E1
=IRR(B2:B6)
The internal rate of return, the discount rate at which the net present value of the cash flows is zero. =IRR(B2:B6) needs at least one negative and one positive value.
It could not find a rate, usually because all the cash flows have the same sign. Include the investment as a negative number.