Internal Rate of Return (IRR)
The internal rate of return is a financial tool for investment analysis and the cost loan evaluation. It represents
the discount rate that equates to zero the present value of a discounted cash flow.
The internal rate of return when it is greater than the attractive rate of return indicates that the investment is economically attractive.
The Minimum Attractive Rate of Return (MARR) or opportunity cost is the interest rate of the best return on an investment alternative.
For an investment, the investor sees three possibilities for the IRR:
a) IRR greater than the opportunity cost - satisfactory project (profitable);
b) IRR equal to the opportunity cost - indifferent project (no profit or loss);
c) IRR less than the opportunity cost - unsatisfactory project (loss).
To request funding, the lower of the IRR is the best alternative. It is on the contrary, the best alternative is therefore the highest IRR.
The internal rate of return, used as a measure of investment analysis assumes that the rate of return is equal to the reinvestment rate which is different from the reality of a project.
The IRR, for the non-conventional cash flows, which, disbursements and reimbursements are alternated more than once, the situation is more dramatic. To get results more consistent with reality and adapt to different cash flow models can use another version of the IRR called Modified Internal Rate of Return (MIRR).
To calculate the internal rate of return, the values must be reported in a chronological order. The rate of return obtained corresponds to the periodicity of cash flows.
The initial value must be entered with a negative sign since it represents the initial investment of the project. For all other disbursements, also enter with a negative sign.
How to calculate IRR.
DuPont Analysis Investments - Net Present Value Discounted Cash Flow (DCF) Internal Rate of Return (IRR) Modified Internal Rate of Return (MIRR) Average Interest Rate Average Rate of Return Break-Even Point in Quantities Break-Even Point (BEP) in Sales French Amortization System Constant Amortization System German Amortization System Sinking Fund American Amortization System Amortization - Average Constant and French Straight Line Depreciation Method Sum of Digits Depreciation Method (SYD) Balance Sheet Analysis Cash Flow Statement by Direct Method Cash Flow Statement by Indirect Method