Quick Financial Question about IRR

[simms]

Basically my question is: Does interest rate affect IRR?

Inflation will affect IRR, but in my spreadsheet, the interest rate only affects NPV.

(see below for example)

This is my cashflow over 3 years, assume interest rate of 4%...

Yr 1 | -$300M
Yr 2 | $100M
Yr 3 | $500M

Is my IRR based on those numbers, or do I have to bring them all back to year 1 value?

 

[WildHorse]

The IRR rule does not discount at the opportunity cost of capital. Instead, it implicitly assumes that the time value of money is the IRR, since all cash flows are discounted at that rate. This implicit assumption has come to be called the reinvestment rate assumption.

...

Although the IRR does discount cash flows, it does not discount them at the opportunity cost of capital. (which violates a fundamental capital budgeting principle that cash flows should be discounted at the opportunity cost of funds. -Thomas E. Copeland

in my spreadsheet, the interest rate only affects NPV

Remember, the IRR is an implied interest rate. It's the rate which makes the NPV of cash outflows & inflows =0.

Is my IRR based on those numbers

Yes

or do I have to bring them all back to year 1 value?

That's what the IRR formula itself already DOES. It takes each future cash flow, discounts it at the UNKNOWN RATE, and sums them all up. It finds the UNKNOWN RATE which makes the sum = 0.

You CAN'T discount each starting cash flow back to year 1 value because you don't know what rate to discount with. That rate is exactly what the IRR calculation gives to you.

Suggest you either use your financial calculator or else Excel. THe Excel function wizard has an IRR function built in.