Calculating the Internal Rate of Return (IRR)

Now that we know how to calculate the NPV in our model, calculating the IRR is easy, as it is just an application of the XIRR function. Before we do that, it is worthwhile to look more closely at what the IRR is.

In the chart below, the NPV is plotted for a single property against different possible values of the discount rate:

Figure 2.6.16: NPV for varying discount rates

It is not easy to see in this chart, but the line has a slight curve; which is to be expected as the NPV is some complex polynomial function of the discount rate. Remember that the definition of IRR is the discount rate at which the NPV equals zero. The chart contains a (horizontal) constant line at zero to allow for visually determining where the IRR must be. The vertical, dotted line is an approximation of the IRR. As can be seen in the chart, for some discount rates, the NPV for this property is positive, but for other discount rates, it is negative...