kastkingsharky3baitfeeder6000| Calculation formula for internal rate of return: Understand the specific calculation formula for internal rate of return

Calculation Formula of Internal rate of return

Internal rate of return (Internal Rate of Return, referred to as IRR) is one of the financial evaluation indicators of investment projects or capital operation, mainly used to measure the profitability of investment projects. The core idea of IRR is to find the discount rate that makes the net present value of the project zero, that is, the income and cost of the project are balanced under the discount rate. It is very important for investors or financial analysts to understand the specific calculation formula of IRR.

First, we need to understand the concept of cash flow. Cash flow refers to the cash inflows and outflows generated by the project during its life cycle. The formula for calculating cash flow isKastkingsharky3baitfeeder6000Cash flow = cash inflow-cash outflow. The cash flow of the project may be different at different time points, so it is necessary to use the discount rate to convert the future cash flow into the present value for comparison and analysis.

Next, we introduce the formula for calculating the internal rate of return. Suppose the investment cost of the project is I, the life cycle of the project is n years, and the annual cash inflow is expected to be C1, C2.Kastkingsharky3baitfeeder6000..., Cn . We need to find a discount rate r to make the net present value (NPV) of the project equal to zero. That is,Kastkingsharky3baitfeeder6000:

NPV = I + Σ (Ci / (1 + r) ^ I) = 0

Where I represents the point in time of the project, from 1 to n. In order to understand this equation, we need to use numerical methods, such as Newton method, dichotomy and other iterative methods.

In the actual calculation process, Excel and other spreadsheet software can be used for fast calculation. Here is a simple example:

Year cash inflow (10,000 yuan) 0-300 1 100 2 150 3 200

Assuming that the investment cost of a project is 3 million yuan, it is expected to generate cash inflows of 1 million yuan, 1.5 million yuan and 2 million yuan respectively in the next three years. We can use the IRR function of Excel to calculate the internal rate of return of the project. Enter the above data in cells A1 to A4, and then enter the following formula in any cell:

= IRR (A1Kastkingsharky3baitfeeder6000: A4)

The calculated result is 26.43%, that is, the internal rate of return of the project is 26.43%.

It should be noted that although the internal rate of return is an important investment evaluation index, it is not the only index. In the actual investment decision, it is also necessary to make a comprehensive analysis with other financial indicators (such as net present value, investment payback period, etc.) as well as the industry background and market environment of the project.