Internal rate of return (IRR) that is also known as the discounted cash flow rate of return (DCFROR), is commonly used to evaluate the profitability of an investment. For folks who like to sign up for an investment plan, endowment plan and wealth accumulation plan to enhance their wealth management and diversification certainly would like to know the internal rate of return. Normally, the IRR is not mentioned in the plan, but can be easily calculated with Microsoft Office Excel application. With Microsoft Excel, you can calculate IRR yourself to avoid any misleading cases due to dishonest financial planner and agent, you need a series of periodic cash flows like that shown in the figure below.
The IRR can then be calculated using the following formula, with 0.1 being the initial guess at the rate:
=IRR(values,guess)
=IRR(B2:B6,0.1)
The IRR formula requires at least one negative and one positive value. Normally, the negative value at t=0 represents the initial investment. The future cash flows can be negative or positive, but they need to be periodic (occuring at t=1, t=2, t=3, etc). If you have non-periodic cash flows, you can use the XIRR formula.
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