Calculating an internal rate of return is tricky. It uses an iterative calculation or sometimes known as a Newton Raphson search. It's very difficult to do this and it's time consuming to do it manually, so we're going to get Excel to do it for us. There are two functions you can use for IRR. There's a standard IRR function, which just assumes that the cash flows fall at the end of each period. And for more accuracy, there is the XIRR function. And all that means is that you can give the specific cash flows, specific dates, which is helpful if the periods are not standard. In other words, you may have nine months between two cash flows and six months between other cash flows.

However, for most projects, the standard IRR function can be used pretty effectively and you don't need to use the guess in most situations in the function because you only have one change in the sign of the cash flows from negative during the construction phase to positive during the operational phase.

So you can see here, this is just an example of a series of cash flows, three years of construction in years one, two, and three, and then the remaining period of six years of operations. And we just use an IRR function that references those cash flows and it gives us 18.1%.

In some investments you may have a repeating cash flow, and this is especially true of some of those bond investments. And in these situations you can use the rate function here, you just need to put in the arguments for the rate function. So the first item is the maturity. The second item is the amount of interest in cash. The third item is the initial investment, and then the fourth item is the remaining or the power value of the loan. So there are two methods of calculating the IRR.