The Internal Rate of Return (IRR) is a financial tool used to assess the profitability of investments, similar to Net Present Value (NPV). It represents the break-even interest rate where the present value of future cash inflows equals the initial investment, guiding decisions on whether to pursue a project.
IRR is compared to the required rate of return, which is the minimum return expected based on the project's risk and opportunity cost. As the rate where NPV equals zero, IRR is crucial for evaluating more complex investments.
While calculating IRR for a single-period investment is relatively simple, it becomes more challenging for multi-period investments. For instance, take an investment that costs $100 and generates $60 in annual cash flows for two years. Calculating the return on this investment is not immediately straightforward. The IRR identifies the discount rate that equates the present value of these cash flows with the initial investment.
Using the IRR function in Excel or a financial calculator, the IRR can be computed by simply inputting the estimated cash flows. This streamlines the calculation, allowing quick and accurate results without requiring manual trial and error.
By providing a single annual rate of return, IRR simplifies comparing various investment options, regardless of their size or duration, helping decision-makers choose the most profitable projects.
Z rozdziału 7:
Now Playing
Capital Budgeting
144 Wyświetleń
Capital Budgeting
237 Wyświetleń
Capital Budgeting
128 Wyświetleń
Capital Budgeting
95 Wyświetleń
Capital Budgeting
277 Wyświetleń
Capital Budgeting
142 Wyświetleń
Capital Budgeting
85 Wyświetleń
Capital Budgeting
49 Wyświetleń
Capital Budgeting
69 Wyświetleń
Capital Budgeting
251 Wyświetleń
Capital Budgeting
137 Wyświetleń
Capital Budgeting
54 Wyświetleń
Capital Budgeting
39 Wyświetleń
Capital Budgeting
46 Wyświetleń
Capital Budgeting
47 Wyświetleń
See More
Copyright © 2025 MyJoVE Corporation. Wszelkie prawa zastrzeżone