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
| A | B |
| Year 1 | -250000 |
| Year 2 | 3500 |
| Year 3 | 12000 |
| Year 4 | 8000 |
| Year 5 | 9000 |
| Year 6 | 12000 |
| Year 7 | 12500 |
| Year 8 | 12000 |
| Year 9 | 290000 |
| IRR Excel -IRR( cells in Column B) | 5.12% |
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
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About Author
Paolo
I am a realtor and investor in the DC area