IRR calculation in excel using Goal Seek Function

Calculating IRR by using Goal Seek Function in Excel

FOUNDER

What is Goal Seek?

• “Goal Seek” in Excel is a function to back calculate the input so as to get the desired output.

• “It is very useful when one knows the desired result but do not know the inputs to reach to the desired result.

• We can also refer it as back solving function.

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Let us understand Goal Seek with the help of a simple example • Mr. John has USD 100,000/- in his bank account available for investment today. He wants to invest this amount in such a way that he can double it in 10 years. Tax rate in this example is 0%. • Here are the details:

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Will a bank deposit double his investment in 10 years?

• Maturity amount if invested in a bank deposit can be calculated as follows:

• Principal amount = USD 100,000 • Rate of return = 4% • Time period (n) = 10 years • Maturity amount from bank deposit = USD 148,024/• This amount is significantly lower than what was originally planned (ie; USD 200,000) Email: Support@skillfinlearning.com

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Calculating IRR with the help of Goal Seek (1/4)

• We can calculate the IRR to double the investment amount in 10 years - Either manually by several iterations, or - with the help of Goal seek function in excel.

• To use “Goal Seek” first calculate the return from the amount invested in bank deposit in Excel (as explained in the previous slide)

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Calculating IRR with the help of Goal Seek (2/4)

• Then Go to Data in the Menu Bar, Select What if analysis, then select Goal Seek from the drop-down menu.

You get the following Goal Seek arguments (see below)

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Calculating IRR with the help of Goal Seek (3/4)

“Set Cell” is the output cell (ie.; The maturity amount (Cell D6) in this examples).

“By changing cell” is the input cell to get the desired amount. We need the IRR in our example, so the input here is the rate of return (cell D4)

“To Value” is the desired output. (USD 200,000 in this example)

Select OK after entering all the inputs.

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Calculating IRR with the help of Goal Seek (4/4)

Goal Seek, calculates the rate of return of 7.2% to get USD 200,000/- required

by Mr. John. That means that the internal rate of return has to be at least 7.2% to double the investment amount in 10 years Email: Support@skillfinlearning.com

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