Calculation method of period Internal rate of return and comparison with other Investment Evaluation Indexes

The period internal rate of return (IRR) is an important evaluation index in investment decision. This paper will introduce the calculation method of IRR in detail and compare it with other investment evaluation indicators such as net present value (NPV) and investment payback period, so as to help investors understand and use these tools more comprehensively.

First, the calculation method of internal rate of return (IRR)

IRR refers to the discount rate at which the net present value of the cash flow of an investment project is 00:00. To calculate the IRR, it is necessary to analyze the cash flow of the project, and then calculate the discount rate by mathematical methods such as iterative method. Here is a simple IRR calculation step:

1. Determine the investment cost and expected return of the project, as well as the duration of the project.

two。 Calculate the annual cash inflow and outflow according to the cash flow statement of the project.

3. The iterative method is used to solve the discount rate when the net present value (NPV) is 00:00. You can use the IRR function in Excel or the financial calculator to do the calculation.

For example, suppose an investor invests in a project with an initial investment cost of 100000 yuan and a project duration of 5 years. The expected annual cash inflows are 30,000 yuan, 40,000 yuan, 50,000 yuan, 60,000 yuan and 70,000 yuan respectively.Top5cryptogames2022We can use the IRR function of Excel to calculate IRR:

Year cash inflow (ten thousand yuan) cash outflow (ten thousand yuan) net cash flow (ten thousand yuan) 0-100-10 1 3 0 3 4 0 4 3 5 0 5 4 6 5 7 07

In Excel, enter the above cash flow data into A1Top5cryptogames2022In the cell of D6, and then enter the following formula in any cell:

= IRR (A1:D6)

The calculated result is IRR ≈ 22.35%.

Second, the comparison between the internal rate of return and other investment evaluation indicators.

1. Net present value (NPV): NPV refers to the present value of the difference between cash inflow and cash outflow of project investment. Compared with IRR, NPV can more directly reflect the value of investment projects. When NPV is greater than 0, the project has a certain investment value; when NPV is less than 0, the project should be abandoned. However, NPV can not directly reflect the income level of the project, so IRR can be used as a supplementary indicator.

two。 Investment payback period: the investment payback period refers to the recovery time of the investment cost in the investment income. Compared with IRR, the payback period of investment pays more attention to the speed of capital recovery, which is suitable for investors with higher requirements for capital liquidity. However, the payback period of investment can not reflect the long-term return of the project, so the evaluation of the project should be combined with indicators such as IRR.

To sum up, IRR, as a key index in investment evaluation, can help investors to understand the income status of the project more accurately and comprehensively. In the actual investment process, investors should combine NPV, investment payback period and other indicators to make a comprehensive analysis of the project in order to make a more wise investment decision.