Detailed explanation of the calculation method of expected internal rate of return

Expected internal rate of return (Internal Rate of Return, IRR) is an important index to evaluate the income of investment projects, especially in the field of finance and economics. This article will analyze the calculation method of IRR in detail to help you master the calculation skills easily.

What is the expected internal rate of return?

The expected internal rate of return refers to the discount rate in which the net present value of the investment project is equal to zero. In other words, IRR is the interest rate that makes the net present value of cash inflows and outflows of the project reach zero. When the IRR is higher than the minimum rate of return required by investors, the project is usually regarded as feasible and has investment value.

Second, the basic steps of calculating IRR

oneArcadeuppacman. Determine the cash flow of the investment project. First of all, collect all cash flow data during the project investment period, including the initial investment (usually negative), cash inflows and outflows.

two。 Set the discount rate. Choose an initial discount rate, usually starting at 0.

3. Calculate the net present value. Using the selected discount rate, the future cash flow is converted into current value, and the net present value is calculated together with the initial investment.

4. Adjust the discount rate and repeat the calculation. If there is a large difference between the NPV and zero, the discount rate needs to be adjusted gradually until the NPV is close to zero. When the NPV approaches 00:00, the discount rate is the expected internal rate of return.

III. An example of IRR calculation

Suppose investors consider investing in a project with an initial investment of 10000 yuan, and the cash inflows in the next three years are expected to be 3000 yuan, 4000 yuan and 5000 yuan respectively. Let's calculate the expected internal rate of return for the project.

Current value of annual cash flow discount rate (yuan) 0-10000-10000 1 3000 R1 3000 / (1 + R1) 2 4000 R2 4000 / (1 + R2) ^ 2 3 5000 r3 5000 / (1 + r3) ^ 3

To make the NPV close to zero, we need to find the appropriate discount rate through trial and error.

After many attempts, we found that when the discount rate is about 16.4%, the net present value is close to zero. As a result, the expected internal rate of return for the project is 16.4%.

4. IRR computing tools

In order to simplify the IRR calculation process, many financial software and spreadsheet tools have built-in IRR functions. For example, the IRR function in Microsoft Excel can automatically calculate the expected internal rate of return by inputting cash flow data.

Through this article, you should have mastered the method of calculating the expected internal rate of return. When evaluating investment projects, IRR is a very useful tool to help investors judge the returns and risks of the project. However, it should be noted that IRR is only one of the reference indicators, and the actual investment decision should be taken into account.ArcadeuppacmanHe's a factor.