IRR or Internal Rate of Return is an estimate of how much a company, an individual or a business will earn when investing in a project. Calculating the IRR helps determine whether the investment will have big returns or small returns not worth the investment. However, it is very tricky to calculate for an IRR with a pen, paper and calculator. Calculating for an IRR manually is prone to errors and takes up considerable amounts of time. Luckily, Microsoft Excel has built in formulas including the formula for calculating an IRR.
Here are the steps to calculating for the Internal Rate of Return in Microsoft Excel.
- Know the values. You need to know the amount for investment. If it is a series of investments, you should know the numbers of those too. These are the values. Microsoft Excel needs these values to calculate for the IRR.
- Make a guess. A guess is the estimate amount earned from investing in the undertaking that needs the investment. The undertaking, usually a project, a proposal, or another business, sometimes promises an amount that the investment will earn. If you do not have this, you need to make an estimate. In this instance, the estimate is a guess.
- Start Microsoft Excel. Microsoft excel can be found in the Start menu. For the updated Microsoft Excel 2007, you will find it in the "Microsoft Office" tab, located inside the "All Programs" tab.
- Open a worksheet. An Excel worksheet has columns and rows of little rectangles. These are where you input the numbers for calculation.
- Put in the values. Choose a column that will contain the values. A column is a row of rectangles that go down. Input all values in separate columns if there are multiple.
- Put in the guess. After putting in the values, put in the guess in a cell right below the values to distinguish the formula needed for Microsoft Excel easily.
- Put in the formula. The formula for the IRR goes below the guess. However, with Microsoft Excel, you can choose any cell for the value of the IRR. To avoid confusion, put the formula in the cell right below the values and the guess. The formula for IRR is "=IRR". You have to add to the formula for it to work. If you used the cells A1 for the investment amount, and A2 to A4 for the guesses, the formula will look like this "=IRR A2:A4." The cell you put this formula into generates the Internal Rate of Return amount.
Just input the values and Microsoft Excel will do the rest. Microsoft Excel has plenty of formulas that calculate basic to moderate math formulas. Without Microsoft Excel, it might take a couple of minutes for someone to calculate the Internal Rate of Return. Follow the steps above and you will quickly calculate the Internal Rate of Return for any investment that you choose to put money in. Calculating Internal Rate of Return using Microsoft Excel helps you make a decision regarding how to handle your investments in the blink of an eye.