How do you calculate IRR when there are interim cash flows like the scenario where a PE firm does a dividend recap in year 3 and exits in year 5? I know excel can do it for you with the IRR function, but what is the actual formula? How is excel calculating that?
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Google: Npv and irr of uneven cash flows
Use XIRR. Excel calculates it through iteration.
IRR is the discount rate that equates the present value of future cash returns to equity to the initial purchase price (and any following equity contributions to the business).
Use XIRR in Excel and Excel will iterate to solve for that discount rate.
Without excel or a financial calculator, it's plug and chug. Pick a discount rate and continue to choose a new rate until your NPV is 0
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