3-2-2-3 Internal Rate of Return

The Internal Rate of Return (IRR) is another discounting method. A project must meet a minimum rate of return to be considered further by the organization.  You can use the formula attached here to determine the IRR internal-rate-of-return1 but again you can easily implement the formula in Excel.

The internal rate of return represents the return ( including inflation rate) at which the NPV is zero.  So using the previous NPV example, we are going to  experiment with different values of IRR and create a table of NPV against IRR. We wil draw a graph and the return at which NPV is zero is the IRR.  Click here to see our original Excel table with the return  and inflation combined in one cell and the resulting NPV. irr-example We also show  how the NPV changes with different values of IRR.  You can see that the NPV changes from positive to negative somewhere between a return of 19% and 20%. Thus,  the IRR for this project is somewhere in that range. By plotting a graph we can see that the IRR is about  19.9%. The chart is shown here irr-chart