The below mentioned article provides the formula of internal rate of return.
Internal rate of return (IRR) is a rate that equates cash flow of different points of time. IRR is the rate “r” for which –
Assume that a company raise Rs.100 million loans % p.a. repayable at the end of 5 years at a premium of 1%. Tax saving is at the rate of 30%. Thus net cash outflow for the loan is Rs.7 for the first through 4th year and Rs.108 at the end of fifth year.
Let us now replace the symbols and use the figures:
To solve this equation, we may follow Trial and Error method.
Assume discount factor 8% and check whether the RHS becomes 100. We find it becomes 96.6879. This means to make the RHS 100 we need to reduce the discount factor to 7%.
Assume 7% discount factor and check whether the RHS becomes 100. We find it becomes 100.7130.
So the given cash flow can be discounted to Rs.100 using a rate that falls between 7%- 8%. Applying linear interpolation, we may find out IRR.
Alternatively, We may use Excel function to calculate IRR. Place your Cursor at Cell A7: Command = IRR (A1:A6)