Compute IRR of Investment with Irregular Cash FlowsLast reviewed: June 22, 1995Article ID: Q50442 |
The information in this article applies to:
SUMMARYIn Microsoft Excel, the IRR() function calculates the internal rate of return for an investment with the assumption that all of the cash flows occur at even intervals of time. However, some investments have cash flows that occur at uneven intervals. If you use the IRR() function on an investment that has uneven cash flows, Microsoft Excel assumes even intervals and gives an incorrect value.
MORE INFORMATIONTo get an accurate internal rate of return for an investment that has uneven cash flow intervals, do the following:
=((1+rate)^n)-1where n is the number of periods per year and rate is the value returned by the IRR() function.
ExampleAssume an initial investment of $20,000, and cash flows of $5,000 after one year, $7,500 one year after that, and $10,000 six months after that. Set up your worksheet as follows:
A1| Month A2| -20000 0 A3| 0 6 A4| 5000 12 A5| 0 18 A6| 7500 24 A7| 10000 30 A8| =IRR(A2:A7) ->The formula in A8 returns .03003 A9| =((1+A8)^2)-1 ->The formula in A9 returns .060973 |
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