IRR calculations are quite difficult when the number of cash flows exceed 5, however for number of cash flows limited to a count of 3 one may use the Quadratic formula to find the two IRR solutions. Here the cash flows take the form of a Quadratic equation that is solved to find the two roots of the 2nd degree polynomial. Here me Abraham A. will take you on a guided lesson that will show the various steps required in solving the quadratic equation to find the two internal rate of return values.
The IRR - internal rate of return is used by an analyst to help find an investor's return on investment. The investor would be willing to only invest money if there gains are expected or else the investment will be discarded. However finding an internal rate of return is not such an easy task when the number of cash flows exceed the count of three. For cash flows with number of cash flows of three, the IRR may be found using the Quadratic formula. The series of cash flows in the investment form a polynomial of degree 2, thus allowing us to utilize the quadratic equation. The three cash flows of the investments make up the coefficients of the quadratic equation and one can readily solve this equation using the quadratic formula to find the internal rate of return. Here I present you with an IRR document as as Word file that will explain the IRR calculation using the quadratic formula. It will begin by showing you how the series of cash flows are used to define the quadratic equation and from there to use the quadratic formule for find one or two IRR values.
The "Value Pack" gives away the IRR document and offers the tadXL v0.5 add-in for Excel 2007, 2010 and 2013. The tadXL add-in is a collection of 10 financial functions that are used as worksheet functions to perform investment analysis. One of these functions is the tadIRR function that offers many more features than the native IRR Excel function. For example using tadIRR, you will be allowed to use almost any type of compounding frequency of interest and use of payment periods that are in different lengths. It will also allow you to use the mid-year discounting convention as opposed to the full-year discounting convention. All these features in the tadXL functions allow you to perform complex financial calculations involving appraisal of investments.
Excel IRR function in tadXL v2.5
- tadIRR ( guess rate, cash flows, compounding, period, concentration )
- tadIRRSchedule ( guess rate, discount rates, cash flows, compounding, period, concentration )
- tadXIRR ( guess rate, cash flows, compounding )
- tadXIRRSchedule ( guess rate, discount rates, cash flows, dates, compounding )
tadIRRSchedule ( guess rate, discount rates, cash flows, compounding, period, concentration )
tadXIRR ( guess rate, cash flows, dates, compounding )
tadXIRRSchedule ( guess rate, discount rates, cash flows, dates, compounding )