A brief introduction to the calculation method of Internal rate of return
Internal rate of return (Internal Rate of Return, referred to as IRR) is the evaluation of investment projects.MrvegascasinoIt can help investors to judge the profitability and risk of the project. This paper will briefly introduce the calculation method and concept of internal rate of return.
The internal rate of return refers to the discount rate that makes the net present value (Net Present Value, referred to as NPV) of the project zero. In other words, it represents the average annualized rate of return on project investment. When the internal rate of return is higher than the minimum rate of return required by investors, the project is usually considered to have investment value.
The basic steps for calculating the internal rate of return are as follows:
oneMrvegascasino. Determine the cash flow of the project: first, the expected cash inflows and outflows of the project need to be collected, including the initial investment and benefits or costs for future periods.
two。 Establish the net present value model: use cash flow data to calculate the discounted value of each period. Divide the future cash inflow and outflow by the power of the corresponding period (1 + discount rate), and then add the discounted value of all periods to get the net present value.
3. Solve the internal rate of return: find the discount rate that makes the net present value zero by iterative method or other mathematical methods. This discount rate is the internal rate of return.
In order to show the calculation process more intuitively, we can use a simple example of an investment project to illustrate. Assuming that a project requires an investment of 1 million yuan, the cash inflows in the next three years are expected to be 400000 yuan, 500000 yuan and 600000 yuan respectively. We want to calculate the internal rate of return of the project.
Year cash inflow (ten thousand yuan) discounted value 0-100-100 1 40 40 / (1 million) 2 50 50 / (1 million) ^ 2 3 60 60 / (1 million) ^ 3In the above table, what we need to solve is the discount rate r so that the sum of NPV is zero. Through iterative method or other mathematical tools, we can find that the internal rate of return of the project is 15%. If the minimum rate of return required by investors is less than 15%, the project has a certain investment value.
It should be noted that although the internal rate of return is of great significance in the evaluation of investment projects, it is not the only criterion. When making investment decisions, investors also need to consider other factors, such as project risk, market environment, competition situation and so on.