Help- Calculating IRR with mutliple negative cash flows?
Hi All,
How do you calculate IRR when you have multiple negative cash flows? For example:
Year 0: (-200,000) Year 1: 100,000 Year 2: 200,000 Year 3: (-100,000) Year 4: 500,000 Year 5: 500,000
Any input is well appreciated, thanks!
You can calculate it using a calculator, but it will only give you one answer...The problem is that if you have a negative cash flow, there will be two rates that make the equation true, and a calculator will just give you the first one. Mathmatically, it's possble, but conceptually, I think the rates will be less relevant.
You can still calculate the IRR using negative cash flows.
Year 0 represents the initial investment. So it looks like $200,000, is you original investment (cash outflow) and you return (cash inflows) $100,000 in Year 1, $200,000 in Year 2, ($100,000) in Year 3, $500,000 in Year 4 and $500,000.
So I would use the XIRR formula in excel, it looks like you will get a pretty good return given the cash flows you will received against your $200,000 investment.
It doesn't really matter if you have a few negative cash flows, as long as the cumulative cash flow return (also taking accounting for time value) is more than your initial outlay....you will always see a return.
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