Do you want to calculating the IRR or Internal Rate of Return of an investment? Use our tool and you will be able to see in a much clearer way the profitability of such investment.
A value of High IRR bodes well for profits and a positive cash flow, while if the Internal Rate of Return does not exceed the minimum, then it must be rejected because of its low effective annual return.
How to use the IRR calculation tool
Our IRR calculator online calculates the Internal Rate of Return automatically. For this we need to know the following data:
- The initial disbursement we will have to do
- The duration in years of such investment
- The collections and payments that we will carry out during the total duration of the investment
Write all these data in each corresponding field of our tool and at every change the IRR percentage will be updated as the associated with the investment.
Calculate the IRR with the rate formula
By definition, Internal Rate of Return (IRR) is the interest rate, r, that makes its net present value zero.. Thus, an investment is worthwhile when the IRR is greater than the minimum return we want, rejecting it if it does not meet this requirement.
Below you have the formula for calculating IRR:
In the Internal Rate of Return formula The following variables can be identified:
- Ais the initial disbursement and therefore has a negative sign since it represents an expense.
- Qyis the cash flow (receipts minus expenses) for each period and.
- nis the duration in years of the investment
- ris the IRR
Calculate IRR in excel
There is a specific formula for calculating the Internal Rate of Return in Excelwhich allows you to create a spreadsheet similar to the one in our tool but which will allow you to work offline.
If you want a example of how to calculate IRR in ExcelIn the table below, open a new spreadsheet, go to cell A1 and paste the data we have in the table below:
|1||4000||Net income for the 1st year|
|2||6000||Net income for the 2nd year|
|3||2000||Net cash flow for the 3rd year|
|4||7000||Net income for the 4th year|
|5||5000||Net income for the 5th year|
Now place yourself in an empty cell and type the following formula to obtain the Internal Rate of Return of the five-year investment period:
If we have done it right, Excel will tell us that the IRR is 6%.
Optionally, the IRR formula in Excel allows us to make estimates, i.e., we can tell the program what percentage we think the IRR will be. In that case, the formula to use would be this one:
If we take our example as a basis, we will assume that we believe that the IRR of the investment will be 10% in its first two years. This will be the formula we will use to know if we are right or wrong:
If you have any doubts about the IRR calculation, leave us a comment and we will answer any questions you may have.