Hi There.

Math idiot needs help!  
I've done a calculation and come up with 3 different answers:

IRR = 12%      (Microsoft Excel)
IRR = 12.671%  (Internet site)
IRR = 12.3%    (Manual calculation by yours truly)


Here are the details:

Period 0       Deposit $1000
Period 1       Receive $10 interest
Period 2       Receive $10 interest
Period 3       Receive $10 interest
Period 4       Receive $10 interest
Period 5       Receive $10 interest
Period 6       Receive $10 interest
Period 7       Receive $10 interest
Period 8       Receive $10 interest
Period 9       Receive $10 interest
Period 10      Receive $10 interest
Period 11      Receive $10 interest
Period 12      Receive $10 interest + $1000 original investment ($1010 total)


The discrepancy may or may not be related to this:  Excel seems to
work well when all periods are identical.  But when the periods are
different, Excel results sometimes get "weird."


A 5-star answer would be the correct IRR.  Please let me know if you
used software or the Internet to calculate it, as I would like to get
better at these calculations myself.

Thanks a million!
ron

Hello ron!
The Excel calculation is actually correct. Let's review the result in detail.

When you calculate the IRR in Excel, it will give you the rate "per
period", irrespective of whether these periods are days, months, or
years. When I plugged your cash-flow table in Excel, I got that the
IRR is 0.01 or 1%. Basically, the calculation Excel does in your case
is finding "i" such that:

0 = -1000 + 10/(1+i) + 10/(1+i)^2 + ... + 10/(1+i)^11 + 1010/(1+i)^12

So Excel has found correctly that i=0.01. If you plug i=0.01 into the
above equation, you'll find that the right-hand side is equal to zero,
so the equation (which is the equation for IRR) is correct.

The difference in results arise because it appears that you tried to
annualize this return, assuming the "periods" are months. So, with no
compounding, 1% monthly is the same as 12% yearly, which is the Excel
answer you post. However, if you annualize the monthly 1% using
compounding, then the annual rate becomes:

 (1 + 0.01)^12 - 1
= 1.01^12 - 1
= 1.1268 - 1
= 0.1268

So the result in this case is 12.68%, which is the answer the Internet
site gives (the small difference must be due to different computation
methods).

Summing up, the IRR "per period" is 1%, as calculated by Excel.
Assuming these periods are months, and that you want to find the
annual IRR, then the result depends on whether you are using monthly
compunding (in this case, annual IRR would be 12.68%) or not (so
annual IRR would be 12%).


I hope this helps! If you have any questions regarding my answer,
please don't hesitate to request a clarification. Otherwise I await
your rating and final comments.

Best wishes!
elmarto

El Genius,

I am most impressed.  

Thanks a million...er...uh...um...1000000.68 !

ron