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IRR Computation With Excel IRR Function & Verification With NPV Calculation

The document discusses using the Excel IRR function and NPV calculations to determine the internal rate of return (IRR) for three cash flow scenarios. The first scenario has equal cash flows each year and calculates an IRR of 10%. The second has smaller early cash flows and larger later cash flows, yielding an IRR of 9.13%. The third has larger early cash flows and smaller later cash flows, with an IRR of 20.27%. The IRR is lower or higher depending on whether cash flows are smaller or larger in early versus later years, even when total cash flows are the same.

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Mohammed Zahin O V
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58 views2 pages

IRR Computation With Excel IRR Function & Verification With NPV Calculation

The document discusses using the Excel IRR function and NPV calculations to determine the internal rate of return (IRR) for three cash flow scenarios. The first scenario has equal cash flows each year and calculates an IRR of 10%. The second has smaller early cash flows and larger later cash flows, yielding an IRR of 9.13%. The third has larger early cash flows and smaller later cash flows, with an IRR of 20.27%. The IRR is lower or higher depending on whether cash flows are smaller or larger in early versus later years, even when total cash flows are the same.

Uploaded by

Mohammed Zahin O V
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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IRR computation with Excel IRR Function & Verification with NPV calculation

Year Date Cash Flows Present Value of


cashflows discounted @
10.00%
Year 0 1-Jan-09 -100 -100.00
Year 1 1-Jan-10 10 9.09
Year 2 1-Jan-11 10 8.26
Year 3 1-Jan-12 10 7.51
Year 4 1-Jan-13 10 6.83
Year 5 1-Jan-14 110 68.30
Total negative cash flows or outflows 100 100.00
Total positive cash flows or inflows 150 100.00
Sum of positive and negative discounted cash flows 0.00
Internal Rate of Return (IRR) 10.00% This is equivalent to the discount rate which makes the NPV of cash flows Zero as above
IRR Calculation with unequal cash flows: (Smaller cash inflows in initial years and larger cash inflows in later years)
Year Date Cash Flows Present Value of
cashflows discounted @
9.13%
Year 0 1-Jan-09 -100 -100.00
Year 1 1-Jan-10 0 0.00
Year 2 1-Jan-11 5 4.20
Year 3 1-Jan-12 10 7.69
Year 4 1-Jan-13 15 10.58
Year 5 1-Jan-14 120 77.53
Total negative cash flows or outflows 100 100.00
Total positive cash flows or inflows 150 100.00
Sum of positive and negative discounted cash flows 0.00
Internal Rate of Return (IRR) 9.13%
IRR Calculation with unequal cash flows: (Larger cash inflows in initial years and smaller cash inflows in later years)
Year Date Cash Flows Present Value of
cashflows discounted @
20.27%
Year 0 1-Jan-09 -100 -100.00
Year 1 1-Jan-10 50 41.57
Year 2 1-Jan-11 40 27.65
Year 3 1-Jan-12 30 17.24
Year 4 1-Jan-13 20 9.56
Year 5 1-Jan-14 10 3.97
Total negative cash flows or outflows 100 100.00
Total positive cash flows or inflows 150 100.00
Sum of positive and negative discounted cash flows 0.00
Internal Rate of Return (IRR) 20.27%
IRR lower than in case A (above) because of smaller cash inflows initial years vis--vis later years, though absolute
values of aggregate cash flows is same in both A & B cases
IRR higher than in case A (above) because of larger cash inflows initial years vis--vis later years, though absolute
values of aggregate cash flows is same in all the above cases
A
Discounted from Year1 to Year0
Discounted from Year2 to Year0
Discounted from Year3 to Year0
Discounted from Year4 to Year0
Discounted from Year5 to Year0
<=Net Present Value (NPV)
This is equivalent to the discount rate which makes the NPV of cash flows Zero as above
IRR Calculation with unequal cash flows: (Smaller cash inflows in initial years and larger cash inflows in later years)
B
Discounted from Year1 to Year0
Discounted from Year2 to Year0
Discounted from Year3 to Year0
Discounted from Year4 to Year0
Discounted from Year5 to Year0
<=Net Present Value (NPV)
IRR Calculation with unequal cash flows: (Larger cash inflows in initial years and smaller cash inflows in later years)
C
Discounted from Year1 to Year0
Discounted from Year2 to Year0
Discounted from Year3 to Year0
Discounted from Year4 to Year0
Discounted from Year5 to Year0
<=Net Present Value (NPV)
IRR lower than in case A (above) because of smaller cash inflows initial years vis--vis later years, though absolute
values of aggregate cash flows is same in both A & B cases
IRR higher than in case A (above) because of larger cash inflows initial years vis--vis later years, though absolute
values of aggregate cash flows is same in all the above cases

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