# IRR Calculation

#### MTS

##### New Member
Hi there.

I am trying to understand how/why the IRR calculation is different than I would inherently assume. Let me explain.

You can also view the simple file I created here on dropbox.
https://dl.dropbox.com/u/83120324/IRR Calc.xlsx

Assume an investor required a 10% internal rate of return for investing in a particular investment (real estate in this case). They investor is guaranteed a return of principal plus a 10% IRR before the developer gets any money.

If I assume that any money that is put into the project should earn interest at 10% every month, the balance to be repaid to the investor should grow by 10% every month right? (Beginning balance + new contributions = total *10% minus any repayments = Ending Balance). So why when I run an XIRR calculation at the end of the period does the IRR come back as 11.59% instead of 10%. I hard-code plug the last cash outflow to repay the investor balance that has grown at 10% every period.

Maybe I am not taking into account compounding interest the correct way but I prefer to see an account balance that is growing every month instead of a long excel formula that is difficult to understand. I would appreciate anyone's "simple" solution or answer to this problem! Thanks for your time!

If you need me to explain more please let me know.

### Excel Facts

Using Function Arguments with nested formulas
If writing INDEX in Func. Arguments, type MATCH(. Use the mouse to click inside MATCH in the formula bar. Dialog switches to MATCH.
XIRR returns an annualized rate of return. In your case 10% is what you would expect at the end of the first year if you made a single, initial capital contribution and did nothing more for one year. In your case you are making an additional capital contribution and you have a series of withdrawals during the 11 month period you are using (note that your initial capital contribution is 1/31/12 and your final withdrawal is 12/31/12 - a period of 11 months - while the XIRR value is annualized. If you change the initial date to 1/1/12 the IRR drops to 10.57%. If you make the first date 1/1/12 and remove all payments and withdrawals except a final date withdrawal of 11,000,000, the XIRR function returns 10%.

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