Excel's Formula - sisman

Cell D21 contains this formula:
=FV(D20,C3,0,–1)–1
The following formula, in cell D23, is a validity check:
=NPV(D20,D7:D18)+D6
Chapter 12: Discounting and Depreciation Formulas 329
The IRR is the rate at which the discounting of the cash flow produces an NPV of zero. The formula
in cell D23 uses the IRR in an NPV function applied to the same cash flow. The NPV discounting
at the IRR (per month) is $0.00 — so the calculation checks.
Geometric growth rates
You may have a need to calculate an average growth rate, or average rate of return. Because of
compounding, a simple arithmetic average does not yield the correct answer. Even worse, if the
flows are different, an arithmetic average does not take these variations into account.
A solution uses the IRR function to calculate a geometric average rate of return. This is simply a
calculation that determines the single percentage rate per period that exactly replaces the varying
ones.
This example (see Figure 12-13) shows the IRR function being used to calculate a geometric average
return based upon index data (in column B). The calculations of the growth rate for each
year are in column C. For example, the formula in cell C5 is
=(B5/B4)–1
The remaining columns show the geometric average growth rate between different periods. The
formulas in Row 10 use the IRR function to calculate the internal rate of return. For example, the
formula in cell F10, which returns 5.241%, is
=IRR(F4:F8,–90%)
In other words, the growth rates of 5.21%, 4.86%, and 5.66% are equivalent to a geometric average
growth rate of 5.241%.
The IRR calculation takes into account the direction of flow and places a greater value on the
larger flows.