How to Calculate Internal Rate of Return (IRR) with Excel

Internal rate of return (IRR) that is also known as the discounted cash flow rate of return (DCFROR), is commonly used to evaluate the profitability of an investment. For folks who like to sign up for an investment plan, endowment plan and wealth accumulation plan to enhance their wealth management and diversification certainly would like to know the internal rate of return. Normally, the IRR is not mentioned in the plan, but can be easily calculated with Microsoft Office Excel application. With Microsoft Excel, you can calculate IRR yourself to avoid any misleading cases due to dishonest financial planner and agent.

For example, an investment plan requires you to invest $6,000 annually for 10 years, and $1,000 cash is returned as rebate from year 2 to year 10, followed by $2,500 yearly cash rebate from year 11 – 19. For final year (20) which is when the plan is terminated, you can get back another one lump sum of $80,000. So, what’s the internal rate of return?

Formula to use in Excel is IRR(values,guess).

Note: guess is a number that you guess is close to the result of IRR; Excel will use the default value of 0.1 (10%) if omitted. It’s normally no need to enter a guess value for the IRR calculation.

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How to Calculate Time Value for Money with Microsoft Excel (Power of Compound Interest)

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There is a lot of financial or investment tools in the market to help you achieve your financial goal with a peace of mind. However, some unscrupulous financial advisors or agents may just be more concerned about their sales target or bottom line instead of yours might feint you if you totally have no idea on the concept or calculation of compound interest (time value or money).

For example, investment advisor who just wanna close the sale may mislead you about the actual return of a saving plan, such as plan where you save $10,000 in one lump sum, and after 20 years you can get back a total return of $20,000. On paper, 20k return – 10k capital will equal to 10k profit. 100% profit divided by 10 years period equal to 10% interest rate annually. Is it true? No, this is definitely a misleading calculation for compounding interest. To stay away from the financial trap, you’re strongly advised to learn more about the how compound interest works. For your knowledge, it’s possible to use some Microsoft Office Excel functions to easily, accurately calculate the exact rate related to time value of money.

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