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The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment.

The IRR reflects the anticipated gains a project creates as a percentage of the project’s initial investment. It’s the interest rate — also called the discount rate —that would result in the present value of the capital investment being equal to the value of the total returns over time. The formula looks like this: 

NPV= ∑ {Period Cash Flow / (1+R)^T} - Initial Investment

R is the interest rate. T is the number of time periods. IRR is calculated using the NPV formula by solving for R if the NPV is zero.

Calculating IRR for a one-year project with one capital investment and one payout is straightforward. If a one-year project needed an initial outlay of $10,000 that yields a return of $15,000, the IRR must be 50% to bring its NPV to zero.

Calculating projects with multiple investments and payouts through Microsoft Excel is simple.

Start by putting all anticipated cash flows in adjacent cells, starting with the initial outflow. A five-year project with one lump-sum investment will have entries in cells A1 through A6. All cash outflows are negative numbers. Once all values are entered, input the formula =IRR(A1:A6) in cell A7. 

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