In this video I’m going to show you how to calculate the internal rate of return for a project in Excel.
So I’ve got 6 projects here. For each project, there’s a single cash outflow at the beginning of the project (year 0). This is followed by a series of cash inflows.
Now to calculate the IRR of a project, just type =IRR and highlight the series of cash flows. Excel gives you the option to guess the IRR; if you don’t enter anything, it guesses 0.1 (or 10%) until it finds the rate that makes the project’s NPV equal to zero.
Now you can see that the IRR for project 1 is 6.73%. This is the time-adjusted, annual rate of return for that project. Dragging the fill handle to the right shows you the IRR for each of the other projects. Now if the company’s hurdle rate was 20%, you would only accept projects 5 and 6.
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