If you need to find the internal rate of return, there is an easy way to do this in Google Sheets using the IRR function.
In this tutorial, I will show you how to use the IRR function in Google Sheets.
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What is the Internal Rate of Return?
The internal rate of return is a performance metric used in finance to determine the expected annual growth of an investment.
Basically, the internal rate of return (IRR) is used to estimate the potential profitability of investments.
Using the IRR Function in Google Sheets
The best way to calculate the IRR is to use a spreadsheet program like Google Sheets or Excel. Here we will cover how to use this function in Google Sheets, but know that it is a very similar process in Microsoft Excel.
In Google Sheets, we will be using the IRR function. This function calculates the internal rate of return on an investment when provided periodic cash flows.
The syntax of this function is:
- cashflow_amounts – this argument is an array or range that contains the income or payments of the investment. This must contain at least one negative and one positive amount
- rate_guess – this argument is optional and is set to .1 by default. It is the estimate for what the internal rate of return will be
To show you how to use the IRR function, I will use it to find the internal rate of return on this example data:
In this example, I have 5 years of cashflow_amounts that contain the net income of an investment over a 5 year period. Year zero contains the startup costs of that investment. To use the IRR function to calculate the internal rate of return, I will be setting up my formula like this:
Here is what this looks like in my example:
Here is a step-by-step instruction on how to use this function.
- First, select the cell where you want to calculate IRR
- Next, press the equals sign on your keyboard (=) and type IRR. Press tab when you are done
- Enter the range of cells that contain your cashflow_amounts
- Add your closing parenthesis “)”
- Press Enter on your keyboard
You can see that using Google Sheets to calculate IRR is much faster than doing it by hand. With the IRR function, you can take your cashflows and calculate the IRR in a matter of seconds.
Try to create your own spreadsheet with some example cashflows and calculate the IRR a couple of times to get some experience using this. You will find it’s very easy to do.