Computation Section
Investment Economics
 -Compute Rates

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 just acceptable.

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.


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Operations Management / Industrial Engineering
by Paul A. Jensen
Copyright 2004 - All rights reserved

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