The calculation method of Internal rate of return in Finance

Internal rate of return (Internal Rate of Return)Rhinorsc2reelIRR) is an important concept in financial analysis.Rhinorsc2reelWhich is used to assess the profitability of investment projects This article will introduce the calculation method of IRR in detail to help accounting professionals master this necessary skill.

I. the definition of IRR

The internal rate of return refers to the discount rate that makes the net present value (NPV) of the project equal to zero. In other words, IRR is the annualized rate of return that investors expect from investment projects without considering the value of time. The project is generally considered feasible when the IRR is higher than the minimum rate of return required by investors.

Second, the basic steps of calculating IRR

Determine the cash flow of the project. This includes the initial investment (usually negative) and the expected return for future periods (positive); set a discount rate to calculate the net present value of the project (NPV); adjust the discount rate and repeat step 2 until you find a discount rate that equals NPV to zero, which is IRR.

Third, the calculation example of IRR

Suppose there is an investment project with an initial investment of 10Rhinorsc2reelThe revenue in the next three years is expected to be 4. 5% respectivelyRhinorsc2reel2000 yuan, 5000 yuan and 6000 yuan. Let's calculate the IRR of this project.

Year Cash flow (Yuan) 0-10000 1 4000 2 5000 3 6000

We can calculate NPV by trying different discount rates. For example, suppose the discount rate is 10%:

Year cash flow (yuan) discounted factor discounted cash flow (yuan) 0-10000 1-10000 1 4000 0.9091 3636.40 2 5000 0.8264 3 6000 0.7513 4507.8

Calculate NPV =-10000 + 3636.40 + 4132 + 4507.8 ≈ 2267.2 yuan. Since NPV is greater than zero, we need to try a lower discount rate. After many attempts, we found that when the discount rate is about 8%, NPV is close to zero. Therefore, the IRR for this purpose is about 8%.

IV. matters needing attention

1. When there is a positive or negative alternation of project cash flow, there may be multiple IRR values. In this case, the feasibility of the project needs to be further analyzed.

two。 For projects with unconventional cash flow, you can try to use the modified internal rate of return (Modified Internal Rate of Return, referred to as MIRR) as an evaluation indicator.