Multiple IRRs When More than One Sign Change in the Cash FlowLast reviewed: November 2, 1994Article ID: Q69571 |
SUMMARYThe Internal Rate of Return (IRR) method used by Excel can produce a different solution for each change of sign in the cash flow. You must try different guesses for the rate to find the most accurate solution.
MORE INFORMATIONThe following is an example:
They both result in zero values because that is the relationship between IRR and NPV. The internal rate of return is the rate that sets the net present value to zero. When there are multiple IRRs, there's no good way to tell which result makes more sense. For instance, in the example above, 20% makes sense if the cash flows are annual but probably doesn't make sense if the cash flows are monthly. The outline below illustrates how many IRR values you should expect, according to the number of cash flow sign changes that occur.
REFERENCES"Using Excel," Ron Person and Mary Campbell. Page 241. Que Corporation, 1988. "Microsoft Excel Function Reference." Version 3.00, pages 134-135 and 162-163. "Microsoft Excel for Windows Functions and Macros." Version 3.00, pages 63-64 and 92-94.
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