I thought I’d start up the MBA Monday series again (NPV, Accounting, Investing and all sorts of other goodies) to bring you a really cool calculation you can do in excel that you may not have heard of. It’s called Internal Rate of Return. It’s important because it provides you with an investment return when the inputs aren’t simple to calculate.
How Internal Rate of Return Works:
A simple hypothetical investment like buying Apple stock at $250 and selling it a year later at $500 is simple. Apple pays no dividend and you doubled your money, so it’s a 100% return (annualized).
- But what if you bought $1000 worth of Apple stock every quarter for the past 3 years and sold it all tomorrow?
- Or what if you bought a high yielding stock that’s been paying dividends monthly?
- Or what about a real estate investment where you take distributions once a year and then sell it 10 years later?
How the heck do you figure out the annualized return then? You can’t do it with a simple pencil and paper. This is where the Internal Rate of Return comes into play.
Learn More About the Internal Rate of Return Calculation in Excel
@Darwin
Thanks for starting these up again. While I know or remember having studied some of these topics that you cover, it’s really nice to read it up again as a refresher.
Helps put things in perspective.
It’s tough to go back and dust this stuff off sometimes if you’re not using it routinely, but I love this one for things like dollar-cost-averaging, DRIPs and my real estate investment. Glad you enjoyed!
well, you can do it with a simple pencil and paper. (and a calculator). if you are an ignoramus when it comes to excel. like me.
my mom was the bookkeeper/accountant clerk/assistant controller for the local school district. (yeah, it sucked when all your teachers relied on your mom for their paychecks. sucked for me.) she taught me about spreadsheets when they were, um, spreadsheets.
so i learned the basic principles. but i just never ever need to use excel for anything. so i never learned anything about it.
earlier tonight, i had to make a simple little table. took me two friggin hours. my office girl, it would’ve taken joanna ten minutes (she was out today).
so, this will be welcome education for me. thanks, boss man.
I wouldn’t even want to try to do recurring investments annualized by pen and pencil! (I doubt I could); sorry to hear about the troubles with excel. If it makes you feel any better, I just had to upgrade to Office 2010 at work and it takes me forever to do the same stuff I used to do in minutes under the 2003 version I was used to. For the life of me, I can’t understand why Microsoft does shit like this. It’s like they’re mocking us to see how shitty they can make the user experience while we’re still forced to use their platform (corporations at least)
That’s why buy and hold or buy and accumulate doesn’t work anymore. Too hard to figure out the IRS bite!
MA