lotsofslots| How to calculate the annualized rate of return on internal returns: Understand the calculation methods and steps for the annualized rate of return on internal returns

Detailed explanation of calculation methods and steps of annualized rate of return of internal return

In the field of investment, the annualized rate of return of internal rate of return (IRR) is an important index to measure the return of project investment. It is the rate of return calculated according to the cash flow of the investment project, which can help investors to evaluate the profitability of the project. This paper will introduce in detail the calculation methods and steps of the annualized rate of return of internal return to help investors make better investment decisions.

I. the concept of internal rate of return

Internal rate of return (Internal Rate of Return, IRR) refers to the discount rate that makes the net present value (NPV) of the investment 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. When the IRR is higher than the minimum rate of return required by investors, the project is usually considered feasible.

Second, the basic conditions for calculating IRR

To calculate the internal rate of return, you first need to meet the following conditionsLotsofslots:

oneLotsofslots. Cash flow data of investment projects, including initial investment, cash inflows and outflows, etc.Lotsofslots

twoLotsofslots. The minimum rate of return required by investors, also known as the cost of capital or discount rate.

III. Steps for calculating IRR

1. Calculate net present value (NPV): discount cash inflows and outflows of each period to the initial investment time, and then sum them. The formula is as follows:

Period cash flow (ten thousand yuan) discount factor (1 + discount rate) ^ period discounted cash flow (ten thousand yuan) 0-1000 1-1000 1 300 1.10 272.73 2 272.73 1.21 413.21 3 600 1.33 450

NPV =-1000 + 272.73 + 413.21 + 450 = 25.94 (ten thousand yuan)

two。 The trial and error method or other numerical methods are used to solve the discount rate of NPV=0. For example, using the IRR function in Excel and entering cash flow data, you can get an internal rate of return of 12.35%.

3. Compare the obtained IRR with the minimum rate of return required by investors. If the IRR is higher than the lowest rate of return, the project is considered feasible; on the contrary, the project is not feasible.

IV. matters needing attention

1. When there is unconventional cash flow in cash flow, such as prepayment, deferred payment, etc., it is necessary to adjust the cash flow properly.

two。 For projects with non-traditional cash flow, IRR may have multiple solutions, so you can consider using other indicators such as modified internal rate of return (MIRR) to evaluate.

3. The internal rate of return can only be used for independent project evaluation, not for the comprehensive evaluation of multiple projects.

Through the above methods and steps, investors can accurately calculate the internal return and annualized rate of return of investment projects, so as to make more wise investment decisions. It should be noted, however, that the internal rate of return is not a universal indicator and needs to be evaluated comprehensively in the light of other financial indicators and the actual situation of the project.