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Internal rate of returnCrashracingnitrofueledThe calculation formula and steps of

Internal rate of return (Internal Rate of Return, referred to as IRR) is an important concept in financial analysis, and it is one of the key indicators to evaluate the profitability of investment projects. The internal rate of return refers to the discount rate that makes the net present value of the project equal to zero, that is, the discount rate when the present value of the expected cash inflow of the project is equal to the present value of the cash outflow. This paper will introduce the calculation formula and steps of IRR in detail.

1. The calculation principle of IRR

In the evaluation of investment projects, we are usually concerned about whether the project can bring sufficient returns. In order to measure returns, we need to discount the cash flow of the project. The basic principle of discounted cash flow is to convert the future cash flow to the current period according to a certain discount rate, so as to calculate the current value. When the present value of the cash flow is equal to the investment cost, the discount rate used is the internal rate of return.

Second, the calculation formula of IRR

The calculation formula of IRR can be expressed as follows:

NPV = ∑ (CFt / (1CHR) t)-I NPV = ∑ (cash flow t / (1 + internal rate of return) t)-investment cost

Where NPV represents net present value, CFt represents cash flow of period t, r represents internal rate of return, t represents time, and I represents investment cost.

Third, the calculation steps of IRR

To calculate IRR, follow these steps:

Determine the cash flow of the project. First, we need to collect expected cash flow data for the project, including cash inflows and outflows. Set the initial discount rate. Choosing an initial discount rate usually starts with the average cost of capital of the industry in which the project is located. Calculate the NPV. Calculate NPV according to the formula, if NPV is greater than or equal to 0, the discount rate is lower than the internal rate of return; if NPV is less than 0, the discount rate is higher than the internal rate of return. Adjust the discount rate. Adjust the discount rate according to the plus or minus of NPV and keep trying until you find a discount rate that makes NPV equal to 0. Get the IRR. When NPV is equal to 0, the discount rate used is the internal rate of return of the project.

IV. matters needing attention

When calculating IRR, you need to pay attention to the following points:

Ensure the accuracy of cash flow data. The accuracy of calculating IRR depends largely on the accuracy of cash flow data, so it is necessary to ensure that the data source is reliable. For projects with irregular cash flow, the calculation of IRR can become complex. In this case, we can try to use numerical methods (such as Newton method, dichotomy, etc.). IRR is not suitable for all project evaluations. In some cases, such as cash flow data is difficult to predict or the project is highly uncertain, IRR may not be the best assessment tool.