The Excel IRR function calculates the internal rate of return of an investment based upon a series of cashflows. When investments are compared to one another, a higher IRR indicates a better investment. Negative IRR results indicate poor investments that should be avoided. The IRR function is an Excel financial function.
=IRR(rate, value1, [value2], [value3], …)
rate = the discount rate for a single period
values = the range of cashflows of an investment with payments/investments expressed as negative numbers and returns/income expressed as positive numbers
guess = [optional] a guess of the internal rate of return, if omitted 10% or 0.1 will be used
The IRR function returns the internal rate of return expressed as a percentage. The higher the IRR return value, the better the investment is believed to be.
For example, an investment with an IRR of 11% is a better investment than an investment with an IRR of 8%.
Excel IRR function example
In the example above the IRR function calculates the internal rate of return for an investment of $5000 in 2020 (cell C8), that will result in a series of returns or payments shown in cells C9:C18. The second argument, guess which is optional, is omitted so 10% is used by Excel by default.
The result returned is 4%, which is the internal rate of return for this investment.