What Are the Differences Between Net Present Value and Internal Rate of Return?

Internal rate of return (IRR) is the discount rate when the total present value of capital inflows is equal to the total present value of capital flows and the net present value is equal to zero. If you do not use a computer, the internal rate of return will be trialed with several discount rates until you find a discount rate with a net present value equal to or close to zero. The internal rate of return is a rate of return that an investment desires to achieve. It is a discount rate that enables the investment's net present value to be zero.

Internal Rate of Return

The internal rate of return is a macro conceptual indicator. The most popular understanding is the ability of the project to withstand currency depreciation and inflation that the investment income can withstand. For example, an internal rate of return of 10% means that the project can withstand a maximum devaluation of 10% of the currency each year during the operation of the project, or 10% of inflation.

At the same time, the internal rate of return also indicates the ability to resist risks during the operation of the project. For example, the internal rate of return is 10%, which means that the maximum risk that the project can bear during the operation of the project is 10% per year. In addition, if a loan is required for project operation, the internal rate of return can represent the maximum sustainable interest rate. If loan interest is included in the project economic calculation, it represents the maximum floating value of loan interest in the future project operation process.

For example, if the internal rate of return is based on 8%, and assume inflation is around 8%. If it is equal to 8%, it means that when the project operation is completed, no money is made except for the "wage" taken by itself, but it is still feasible. If it is less than 8%, it means that there is a great possibility that the project operation will be a loss when the project operation is completed. Because of inflation, the money you make in the future may not be enough to cover the cost of your current investment. Projects with long ROI periods are particularly important for internal rate of return indicators. For example, the general investment recovery period for hotel construction is about 10-15 years, and the investment and management period for large-scale tourism development is more than 50 years. This is the most popular and practical meaning of IRR.

(1) Calculation

(1) in calculation

The internal rate of return is what makes an investment happen in the future, considering the value of time.

Internal Rate of Return

Internal rate of return is the main method used in profitability analysis. From

Discussion on the existence of internal rate of return

From the definition of internal rate of return, it corresponds to the root of a univariate high-order polynomial (the definition of IRR). The

Misunderstanding

The internal rate of return indicator is correct when evaluating a single plan. In the comparison of multiple plans, if two or two

When using the internal rate of return method for investment decisions, the decision criteria are: IRR is greater than the minimum required by the company

A project has an initial investment of 2 million and a cash flow of 300,000 each year for the next 10 years. Find the project's internal rate of return (IRR). (Note: The width of the interest rate interpolation interval is less than 1%)

answer:

The internal rate of return (IRR) refers to the rate of return that the project investment actually desires to achieve. In essence, it is the discount rate at which the project's net present value is equal to zero.

-200+ [30 / (1 + IRR) + 30 / (1 + IRR) ^ 2 + .... + 30 / (1 + IRR) ^ 10] = 0, IRR = 8.14%

Note: The answer given by many answers is IRR = 11.923%, which is -29.96 when substituted into the above formula. Substituting IRR = 8.14% into the above formula results in 0.0375. In addition, the result obtained using the Excel function IRR was 8.14%.