You are calculating what economists call nominal rate of return. It's also what
regular people like to see, ie, I'm making 3.55% on my money.

However, as you point out, their purchasing power is being eroded by inflation
each year, in that they can't buy as much with their future dollars as they
could today.

If you want to factor in inflation, you are calculating the real rate of return
(ie, how much is my purchasing power going up).

To calculate real rate of return, it's simple subtraction: Nominal - Inflation =
Real. So you can just quote a 3.55% nominal IRR, or a 0.55% real IRR.

--
Regards,
Fred


"Santa Claus" wrote in message
...
This is more of a mathmatical query than an excel query, but I thought I'd see
if anyone could shed of light on this for me.....

I have the following cashflow series. It is unusual because the income is
recieved upfront (over two years) and the then there is a negative income
stream over the next 6 years.

Using Excel, I get an IRR of 3.55% and a NPV of $2,079.86 using 3% int.

Yr 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
50,000 35,000 -15,000 -15,000 -15,000 -10,000 -10,000 -10,000 -25,000


I'm wondering if should be discounting future year cashflow projections by
say 3% (for inflation) and then calculating an IRR. This would give a smaller
IRR but is this cheating or would it be acceptable?

Its an interesting scenario!! As I said I thought I'd just see if anyone else
has thought this through?

Maybe there is another function or formulea to consider?

Thanks
Santa