The information in this article applies to:
SUMMARY
In Microsoft Excel, if the IRR() function cannot find a solution that
is accurate within .00001 percent after 20 iterations, a #NUM! error
value is returned. If you specify a guess, the iterations start with
that value; if the guess argument is omitted, it is assumed to be 10
percent. If you receive a #NUM! error value and are unsure of what the
guess should be, you can use the NPV() function to determine at what
interest rate the formula result is closest to zero.
MORE INFORMATIONThe net present value and the internal rate of return for a given investment are closely related calculations. The internal rate of return is equal to the interest rate at which the net present value is zero. The following formula shows how you can express the relationship between these two calculations with the NPV() and IRR() functions: NPV(IRR(array),array)=0In this formula, IRR() may return a #NUM! error value if your array contains very large cash flows combined with cash flows that are very small by comparison. IRR() takes two arguments: array (required) and guess (optional). If IRR() returns a #NUM! error value, you must specify a guess. To narrow the range, you can either substitute random values or you can use NPV(). For example, if you have a table with the following cash flows and IRR() formula
without a guess, the formula in cell A6 returns a #NUM! error value. To determine a close guess, use NPV() either by itself or in conjunction with Microsoft Solver. NOTE: You can also use NPV() and Microsoft Solver to check the result of your IRR() function if you think it is incorrect. Using NPV()The NPV() function takes an interest rate and an array argument. For the array, use the cash flows the IRR() is based on (A1:A5) and for the interest rate, use a range of guessed rates of return. Given the data, it's reasonable to assume that the internal rate of return is negative, so begin with the percentages in B1:B6. The Formula column shows the formula to enter in C1:C6 and the Result column shows what that formula returns.
The NPV() goes to zero somewhere between C2 and C3 which use interest rates of -40% and -30% respectively. Since the result in C2 is closer to zero, enter -40% into the IRR() formula in cell A6 so that it resembles the following example:
The result of this formula is 39%. Using NPV() and Microsoft SolverRather than enter a range of percentages to compute the NPV(), you can also enter one guess percentage and the formula and then use Microsoft Solver to calculate the result.For example, use the following data:
To calculate NPV, follow these steps:
Checking your Result with SolverTo check the result of your IRR() function, use NPV() with a blank cell as your first argument and the data range you used for your IRR() function as the second argument. For example if you use the following sample data
the IRR() function returns 10%. To determine if this is correct, click Solver on the Formula menu. In Set Target Cell, enter $C$1; in Equal To, select Value and in Of, enter 0. In By Changing Cells, enter $B$1 and click Solve. Microsoft Solver returns 10% in cell B1. You can then choose to keep or discard the solution. REFERENCES"Function Reference," pages 247, 291-292Additional query words:
Keywords : xlformula |
Last Reviewed: April 6, 1999 © 2000 Microsoft Corporation. All rights reserved. Terms of Use. |