IRR stands for the internal rate of return. IRR is a calculation of what your expected rate of growth is for cash-flow payments. The calculation estimates what the future rate of return is but translates it into present cash value. IRR is typically a calculation for businesses to use in determining the net present value of its money when considering income and initial costs for starting a business. One of the easiest ways to calculate simple IRR is to build a spreadsheet in a spreadsheet program. Then, you can enter in your own values to calculate the IRR for your cash flow payments.
Open a new spreadsheet in your spreadsheet program. Label Column A of the spreadsheet as "Data." This column is where you will input the cash flow information. Label Column B as description, which is an explanation of what the number is that you place in Column A. Number the rows for the number of transactions you will have for the calculation.
Input your data into Column A of the spreadsheet. For example, if you are calculating the IRR for your business and the initial start-up costs are £45,500, then the first number you would input into Colum A on Line 1 is -70,000. The number is negative because it is a cash outlay. The second line would be the net income for the first year in business and so forth and so on.
Input your description of the data in Column B of the spreadsheet. For example, in Column B for the -70,000, you may include a description such as "Startup business costs." Column B, Line 2 would have a description such as "Net income for first year."
Input the IRR formula. Go to a new line in Column A to input the IRR formula. The IRR formula changes according to the IRR you are trying to calculate. For example, if you are trying to calculate the IRR after the fourth year in business, then you need to include the cells in Column A that deal with the net income for the first four years in business. For the IRR of the first four years, you would type the formula "=IRR (A2:A6)."
Press the "Enter" key. From the cell where you input the formula, hit the "Enter" key in order for the spreadsheet to calculate your IRR.
The accuracy of the calculation for IRR using Microsoft Excel is within 0.00001 per cent. The IRR calculation is a relative of the NPV, or net present value, calculation.
Tips and warnings
- The accuracy of the calculation for IRR using Microsoft Excel is within 0.00001 per cent.
- The IRR calculation is a relative of the NPV, or net present value, calculation.