## Npv S0

where S0 is the initial outlay. Fortunately, most spreadsheet programs have an internal routine for its calculation. This is illustrated in Figure 10.1 which shows the calculation of the IRR for the data in Table 10.20 above.

Cell C11 contains the formula '= IRR(C4:C8)' - this can be seen just above the column headings - which is the function used in Excel to calculate the internal rate of return. The IRR for this project is therefore 13.7% which is indeed above the market interest rate of 12%. The final two columns show that the PV of the income stream, when discounted using the internal rate of return, is equal to the initial outlay. The discount factors in the penultimate column are calculated using r = 13.7%.

The IRR is easy to calculate if the income stream is a constant monetary sum. If the initial outlay is S0 and a sum S is received each year in perpetuity (like a bond), then the IRR is simply

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