Below is the note that i keep when i learn about IRR sometimes ago. I also attached the file i use to compute IRR. You can simply put the amount of initial outlay and potential net income for around 5 years ahead, and get the IRR computed by the spreadsheet. Hope you found this useful.
At least, the file is a kind of this :
| Initital Outlay | - | (49,765) | ||
| Net profit | Year | 1 | 7,464 | (42,301) |
| Net profit | Year | 2 | 7,464 | (34,837) |
| Net profit | Year | 3 | 7,464 | (27,373) |
| Net profit | Year | 4 | 33,000 | 5,627 |
| Net profit | Year | 5 | 33,000 | 38,627 |
| IRR | 16.60% |
Business Dictionary says :
IRR is the average annual return earned through the life of an investment and is computed in several ways. Depending on the method used, it can either be the effective rate of interest on a deposit or loan, or the discount rate that reduces to zero the net present value of a stream of income inflows and outflows. If the IRR is higher than the desired rate of return on investment, then the project is a desirable one. However, it is a mechanical method (computed usually with a spreadsheet formula) and not a consistent principle.
Read more: Link to Business Dictionary about IRR
