Formula for calculating the internal rate of return
Posted: Thu Jan 23, 2025 6:52 am
The formula looks like this:
IRR = r, at which NPV = 0
Where:
NPV — net present value of the project's cash flows;
r is the discount rate equal to IRR.
This formula demonstrates that to calculate the internal rate of return (IRR), you need to find a discount rate at which the net present value (NPV) of the project is zero. This can be done canada mobile phone numbers database either manually, by experimenting with different discount rates, or by using specialized financial functions in spreadsheets, such as the IRR function in Excel.
IRR calculation formula
Example of the formula for IRR for an investment project. A complex formula for calculating IRR for an investment project looks like this:
IRR = r, at which ∑ CF_t/(1+r)^t = 0
Where:
CF_t — cash flow in period t;
t — periods (years) of project implementation;
r is the desired discount rate, equal to IRR.
Let's analyze what this could mean using a specific example: a client wants to evaluate the profitability of an investment project that involves investing 100 million rubles over three years with an annual income of 20 million rubles. The discount rate in this case is set at 10%.
Using the IRR formula, we find the internal rate of return of the project:
IRR = discount rate at which NPV = 0
NPV = income - investment.
NPV = 20 million rubles ─ 100 million rubles = ─ 80 million rubles.
In order to achieve a net profit of 20 million rubles, an investment of 100 million rubles and a waiting period of approximately five years are required.
IRR = r, at which NPV = 0
Where:
NPV — net present value of the project's cash flows;
r is the discount rate equal to IRR.
This formula demonstrates that to calculate the internal rate of return (IRR), you need to find a discount rate at which the net present value (NPV) of the project is zero. This can be done canada mobile phone numbers database either manually, by experimenting with different discount rates, or by using specialized financial functions in spreadsheets, such as the IRR function in Excel.
IRR calculation formula
Example of the formula for IRR for an investment project. A complex formula for calculating IRR for an investment project looks like this:
IRR = r, at which ∑ CF_t/(1+r)^t = 0
Where:
CF_t — cash flow in period t;
t — periods (years) of project implementation;
r is the desired discount rate, equal to IRR.
Let's analyze what this could mean using a specific example: a client wants to evaluate the profitability of an investment project that involves investing 100 million rubles over three years with an annual income of 20 million rubles. The discount rate in this case is set at 10%.
Using the IRR formula, we find the internal rate of return of the project:
IRR = discount rate at which NPV = 0
NPV = income - investment.
NPV = 20 million rubles ─ 100 million rubles = ─ 80 million rubles.
In order to achieve a net profit of 20 million rubles, an investment of 100 million rubles and a waiting period of approximately five years are required.