How to compute the IRR in Excel

Jeremy PAULEN

In this article, Jérémy PAULEN (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023) explains everything about the IRR function in Excel, which is used to compute the internal rate of return of a series of cash flow to evaluate the financial performance of an investment in relative terms.

What is the IRR?

The IRR represents the internal rate of return of an investment. It is closely related to the net present value (NPV) of the investment as the IRR is the discount rate that makes the NPV equal to zero.

Consider an investment represented by a series of cash flows CF₀, CF₁, CF₂, …, CF_T, which take into account the revenues and expenses of the project computed or forecasted at time 0 leading to capital inflows and outflows for the firm. The NPV of this investment is given by:

where r is the discount rate that takes into account the risk of the project.

The IRR corresponds to the value of the discount rate for which the NPV is equal to 0:

The IRR is the solution of a non-linear equation:

Note that this equation may have one solution, several solutions or no solution according to the sequence of cash flows.

The internal rate of return (IRR) is an important indicator in the decision-making process as it measures the financial performance of a project. The IRR is a relative measure as its unit is a percentage. The NPV is an absolute measure as its unit is the euro, the dollar, etc.

It makes it possible to measure the future financial performance of a project or a company. The higher the IRR is, the more interesting it is to launch the project.

The IRR can therefore be used in the case of a choice to be made between different investment perspectives, but also to evaluate the company’s share buyback programs.

A limit of using the IRR method is that it does not consider the size of a project. Cash flows are simply compared to the amount of capital outlay generating those cash flows. In other words, considering two projects A and B, the IRR of A may be lower than the IRR of B, while the NPV of A may be higher than the NPV of B.

The IRR function in Excel

How to use the IRR function in Excel?

In Excel, you can get the IRR function in the “Formulas” tab.
You can also type “= IRR (value, [guess])” in the cell where you want to compute the IRR.

The IRR function uses the following arguments:

Values: The cash flow series. Cash flows include investment values and net income.
Guess: a number guessed by the user that is close to the expected internal rate of return

Example

Example: consider a new factory modeled by the following series of cash flows:

CF₀ = -$50,000 (initial cost)
CF₁ = +$5,000 (net cash flow in year 1)
CF₂ = +$8,000 (net cash flow in year 2)
CF₃ = +$13,500 (net cash flow in year 3)
CF₄ = +$18,800 (net cash flow in year 4)
CF₅ = +$20,500 (net cash flow in year 5)

Excel file to compute the IRR of a series of cash flows

You can download below a short video which illustrates how to compute the IRR of a series of cash flows with Excel.

Useful resources

Microsoft IRR function

About the author

The article was written in November 2021 by Jérémy PAULEN (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023)

My Marketing Developer Experience

In this article, Jérémy PAULEN (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023) shares his experience as a marketing developer at the Tennis Club of Rosheim.

Tennis Club of Rosheim

Tennis Club of Rosheim was founded in 1970 and is owned by David Livernais. The premises are located in the sports center of Rosheim, in Alsace. The Tennis Club had 191 members in 2021 and several partners. The Club therefore organizes many events every year.

The club wishes to create a relationship of trust with its members as well as a friendly atmosphere.

My internship at the Tennis Club of Rosheim

During my studies at ESSEC Business School, I had the opportunity to undertake an internship as a marketing developer at the Tennis Club of Rosheim.

Source: Tennis Club Rosheim

I was involved with the marketing department, which is in charge of promoting the club to potential new members. The promotion of a business takes place in several stages. First of all, through the development of a visual identity. The visual identity or graphic identity is a set of coherent visual elements which make it possible to identify the same entity through the different communication media that it uses. Example: Coca-Cola and the color red are almost synonymous with each other. The company uses its signature color on all of its products and all of its marketing materials.

Given my experience in the visual field and my different skills, I was given the responsibility of developing a new visual identity. The only restriction I had was to use the orange color.

I first had to create a logo. The logo is the pillar of a company’s image. A professional logo allows a company to stand out from its competitors, to convey its values and to tell a story. It therefore needs to be studied. The logo I created is made up of three elements:

A tennis ball in the center of the image to evoke the main activity of the club
The date the club was founded: 1970. Integrating a date reassures potential customers Because it implies professional knowledge and experience acquired over the years.
And last but not the least: the name of the club.

Source: Tennis Club Rosheim

I wanted a simple and uncluttered logo to reach as many people as possible.

I also had to create multiple posters to announce the different events. Each of my creations had a similar color code: orange, green and yellow. Orange is the color of cheerfulness, generosity, ambition, and abundance, but more importantly the color of the company. Green symbolizes hope and nature. Yellow is associated with joy, good humor, and radiance.

Promotion also passes through word, including emails or flyers. On several occasions I had to communicate by email with members and partners. Communicating through this media involves many codes. We must respect the codes of politeness and avoid any awkwardness. The emails are written and thus visible at all times.

Every day, the club president organized a general meeting where he talked about global debriefing. The various meetings make it possible to clarify the week’s objectives and to distribute the tasks to the workforce. They also present an opportunity to give feedback and to integrate each employee in the decision-making process. For my part, I took this opportunity to propose a new method of communication: Tiktok.

During my time at the TC Rosheim, I also had the opportunity to organize a large-scale event. Many competitors meet each year for a big competition. It was therefore necessary to find sponsors to finance this event, in our case the main partner was KARANTA. I also had to find volunteers to supervise the event and ensure it was smoothly run.

My key learning outcomes

During my internship at the Tennis Club of Rosheim, I had the opportunity to develop the following (soft) skills:

To manage a team
To meet deadlines
To improve communication skills
To understand the needs and to listen to the expectations of (internal) clients
The ability to learn and to improve my different skills

Three key terms

I develop below three key terms to understand my work.

Visual identity

The visual identity or graphic identity is a set of coherent visual elements which make it possible to identify the same entity through the different communication media that it uses.

A participatory leader

The participatory leader likes to study all the proposals before making a decision. He or she encourages his or her employees and values their work and achievements. A key element is feedback.

Feedback

Feedback is a step back, a testimony on an event that occurred. It allows time to check if the meaning of a message is understood, determine if help is required and verify if everybody is involved.

Useful resources

Tennis Club Rosheim

About the author

The article was written in November 2021 by Jérémy PAULEN (ESSEC Business School, Global Bachelor of Business Administration, 2019-2023).