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In certain cases, you may need to use a function as one of the arguments (argument: The values that a function uses to perform operations or calculations. The type of argument a function uses is specific to the function. Common arguments that are used within functions include numbers, text, cell references, and names.) of another function. For example, the following formula uses a nested AVERAGE function and compares the result with the value 50.

Valid returns    When a nested function is used as an argument, it must return the same type of value that the argument uses. For example, if the argument returns a TRUE or FALSE value, then the nested function must return a TRUE or FALSE. If it doesn't, Microsoft Excel displays a #VALUE! error value.

Nesting level limits    A formula can contain up to seven levels of nested functions. When Function B is used as an argument in Function A, Function B is a second-level function. For instance, the AVERAGE function and the SUM function are both second-level functions because they are arguments of the IF function. A function nested within the AVERAGE function would be a third-level function, and so on.