IRR

IRR (Internal Rate of Return)

What is ‘Internal Rate Of Return :

From Investopedia: Internal Rate of Return (IRR) is a metric used in capital budgeting to measure the profitability of potential investments. Internal Rate of Return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

  Sometimes getting the NPV of a project is not as clear (what does the $362  we had as a result in the exercise at PV-NPV really mean? Is the $362 referring to a Millin dollar investment or a thousand dollar investment? .

 IRR will give us something more clear to work with like a return in percentage. IRR Indicates the percentage rate earned on each dollar invested for a specific period. 

In any case, both IRR and NPV can be calculated easily using Excel or 10Bii

AB
Year 1-250000
Year 23500
Year 312000
Year 48000
Year 59000
Year 612000
Year 712500
Year 812000
Year 9290000
IRR Excel -IRR( cells in Column B)
5.12%
In Excel would a formula like =IRR(B2:B10)

What does it mean? It means that investing 250,000 in year 1 and receiving the sum above From year 2 to Year 9 ) will be equivalent to a 5% return more or less – It is up to you if you think 5% is good enough

Also the 10Bii Calculator App can easily compute IRR

Paolo
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