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method for calculation of IRR

Sreedevi Damodaran (Accounts Executive) (75 Points)

08 October 2008

Hi,

I would like to know the method for calculation of Internal Rate of Return.

thanks

sree

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9 Replies

AMIT (SERVICE) (31 Points)
Replied 09 October 2008

Originally posted by :Sreedevi Damodaran

Hello !,

A sample excel sheet is attached - see if this helps. Else, excel has a ready made formula ( Function / Financial / IRR).

Thank you

Amit

Hi,
I would like to know the method for calculation of Internal Rate of Return.

thanks
sree

Attached File : 33 irr sample.xls downloaded: 2518 times

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Purnima (student) (722 Points)
Replied 09 October 2008

thank you Amit Sir

CA Naveen Kumar Agrawal (Chartered Accountant) (36 Points)
Replied 10 October 2008

Originally posted by :AMIT
"	Originally posted by :Sreedevi Damodaran " Hello !, A sample excel sheet is attached - see if this helps. Else, excel has a ready made formula ( Function / Financial / IRR). Thank you Amit Hi, I would like to know the method for calculation of Internal Rate of Return. thanks sree "	"

Dear Amit ur attached excel file doesnt show the calculation of IRR. its just a inflow outflow schedule using PVF (Present Value Factor). & will u explain me if u dont hv a discounting rate (i.e. IRR) what will u put in the rate field. i know u will say use trial n error method, put any value in rate field & make change in it until one find the NPV = 0. u r right but still there is a problem. what if inflows/ outflows (as the case may be) are different & not the same? even the formula applied by u in PVF is not enough mature to show the effect of a leap and a normal year (in case of daily calculation).

i have solution of all above mentioned. if u wanna find the same, mail me mentioning IRR in Subject field.

to get my mail id just click on my name n u wil find the way.

Regards,

mithun (associate) (24 Points)
Replied 18 November 2008

The Internal Rate of Return (IRR) is the discount rate that generates a zero net present value for a series of future cash flows. This essentially means that IRR is the rate of return that makes the sum of present value of future cash flows and the final market value of a project (or an investment) equal its current market value.

Internal Rate of Return provides a simple ‘hurdle rate’, whereby any project should be avoided if the cost of capital exceeds this rate. Usually a financial calculator has to be used to calculate this IRR, though it can also be mathematically calculated using the following formula:

Equation defining the Internal rate of return

In the above formula, CF is the Cash Flow generated in the specific period (the last period being ‘n’). IRR, denoted by ‘r’ is to be calculated by employing trial and error method.

Internal Rate of Return is the flip side of Net Present Value (NPV), where NPV is the discounted value of a stream of cash flows, generated from an investment. IRR thus computes the break-even rate of return showing the discount rate, below which an investment results in a positive NPV.

A simple decision-making criteria can be stated to accept a project if its Internal Rate of Return exceeds the cost of capital and rejected if this IRR is less than the cost of capital. However, it should be kept in mind that the use of IRR may result in a number of complexities such as a project with multiple IRRs or no IRR. Moreover, IRR neglects the size of the project and assumes that cash flows are reinvested at a constant rate.

(Guest)

Originally posted by :Guest
"	Originally posted by :AMIT " Originally posted by :Sreedevi Damodaran " Hello !, A sample excel sheet is attached - see if this helps. Else, excel has a ready made formula ( Function / Financial / IRR). Thank you Amit Hi, I would like to know the method for calculation of Internal Rate of Return. thanks sree " " Dear Amit ur attached excel file doesnt show the calculation of IRR. its just a inflow outflow schedule using PVF (Present Value Factor). & will u explain me if u dont hv a discounting rate (i.e. IRR) what will u put in the rate field. i know u will say use trial n error method, put any value in rate field & make change in it until one find the NPV = 0. u r right but still there is a problem. what if inflows/ outflows (as the case may be) are different & not the same? even the formula applied by u in PVF is not enough mature to show the effect of a leap and a normal year (in case of daily calculation). i have solution of all above mentioned. if u wanna find the same, mail me mentioning IRR in Subject field. to get my mail id just click on my name n u wil find the way. Regards,	"

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senthil (student) (116 Points)
Replied 05 February 2009

Originally posted by :CA Naveen Kumar Agrawal

please send me the IRR calculations, which the amount is same & different inflows.. my mail id is sen2chennai @ gmail.com

Hi,

I would like to know the method for calculation of Internal Rate of Return.

thanks

sree

"

"

Dear Amit ur attached excel file doesnt show the calculation of IRR. its just a inflow outflow schedule using PVF (Present Value Factor). & will u explain me if u dont hv a discounting rate (i.e. IRR) what will u put in the rate field. i know u will say use trial n error method, put any value in rate field & make change in it until one find the NPV = 0. u r right but still there is a problem. what if inflows/ outflows (as the case may be) are different & not the same? even the formula applied by u in PVF is not enough mature to show the effect of a leap and a normal year (in case of daily calculation).

i have solution of all above mentioned. if u wanna find the same, mail me mentioning IRR in Subject field.

to get my mail id just click on my name n u wil find the way.

Regards,

Krishna Kishore (Employement) (24 Points)
Replied 28 September 2009

If there are two IRR's for a project, one IRR is higher and the other IRR is lower then in this case which IRR is better. Can any one give with good explanation for this.