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IRR definition of formula

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    IRR definition of formula

    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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    Re: IRR definition of formula

    Hi,
    In order to help you - It would be best if you upload a sample file.
    Please see the yellow banner at the top of the page for moreinstructions.

    Thanks.

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    Re: IRR definition of formula

    As explained in the help file (https://support.office.com/en-us/art...0-3ad0c163c1bc ), the IRR() function finds the value for rate that makes the NPV() function (https://support.office.com/en-us/art...b-ac28acf2a568 ) equal 0. I don't know enough about financial functions to be able to say that you are double discounting -- that seems like a question better suited for someone who knows financial math -- but it sounds like you could be.
    Quote Originally Posted by shg
    Mathematics is the native language of the natural world. Just trying to become literate.

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    Re: IRR definition of formula

    I don't need to send any example. I really just need to understand the definition. The link on the MS Office Support website is none-the-wise as far as I'm concerned:

    "IRR is closely related to NPV, the net present value function. The rate of return calculated by IRR is the interest rate corresponding to a 0 (zero) net present value. The following formula demonstrates how NPV and IRR are related:

    NPV(IRR(A2:A7),A2:A7) equals 1.79E-09 [Within the accuracy of the IRR calculation, the value is effectively 0 (zero).]"

    I'm not a mathematician nor financial expert. So my original question still stands - what is the definition of 'IRR'? Does it internally calculate any discounting within the formula?

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