When the project description is constructed,
the cell labeled IRR, cell H5 for the example, is colored green
and has the contents ***. The green color indicates that the
contents of the cell are computed with an algorithm rather than
a function. IRR stands for internal rate of return. It is the
interest rate that makes the net present value of the project
equal to 0. If the MARR is equal to the IRR, the project is
To compute the IRR, choose Compute
Rates from the menu. The dialog shown below allows the selection
of the project or comparison whose IRR is to be computed. In
the present case, there is only one project in the workbook,
E6, so only one appears on the list. In general, all projects
in the workbook are listed. We will have more to say about comparisons
on a later page.
Projects that consist
of one or more investments (negative cash flows) that are followed
by one or more returns (positive cash flows) are called simple investments.
These cash flows only have a single interest rate that satisfies
the condition that the net present worth will be 0. Non-simple
or mixed cash flows may have more than one value. The initial
guess box in the dialog specifies the initial point considered
by the numerical procedure that determines the IRR. Thus the
results may depend on this value for mixed cash flows. The
other two boxes indicate the range over which the search is
conducted. The procedure does not allow negative rates.
Clicking the OK button, initiates the procedure that places
the IRR value of 11.13% in cell I5. If features of the cash
flow are changed, the IRR must be recomputed.