I wish to calculate an internal rate of return, against an on-going annual cost of a contract versus an up-front cost to end that contract in Year 1.
I am using the IRR function as follows: IRR('cost of deal', 'on-going annual contract'). The formula is working as I wish it to. What I need to verify, however, is the definition of the IRR function. Does this function have any form of discount mechanism within it? I know how the formula works but what is it actually doing?
I hope that doesn't sound too simplistic? The reason I ask is because the 'on-going annual contract' figure I have is a total number which has already been discounted using the NPV function at a 10% annual discount rate. So I need to understand the IRR function to ensure I'm not 'double-discounting'.
Thank you.
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