Calculation method and Formula of period Internal rate of return
In the field of investmentGalagaarcadegame, internal rate of return (Internal Rate of Return)GalagaarcadegameIRR) is an important evaluation index to measure the profitability of project investment. This article will describe in detail how to calculate the period internal rate of return and the related formula.
I. definition of internal rate of return for the period
The period internal rate of return refers to the discount rate that makes the net present value (Net Present Value, NPV) of the project equal to zero. In other words, when investors discount the project with the internal rate of return of their useful life, the net present value of the project happens to be zero. This index can be used to measure the level of return and risk of investment projects.
Second, the method of calculating the internal rate of return for the period
There are mainly the following methods to calculate the internal rate of return during the calculation period:
1. Trial and error (Trial and Error): keep trying different discount rates until you find the discount rate that makes the net present value of the project zero. This method is tedious, but it is suitable for simple manual calculation.
two。 Dichotomy (Binary Search): starting from the lowest discount rate, gradually approaching the highest discount rate, reducing the range by half at a time until the recent internal rate of return is found. This method is more efficient than the trial and error method.
3. Newton method (Newton-Raphson Method): this is an iterative algorithm that calculates the short-term internal rate of return by solving the first and second derivatives. The calculation speed of this method is fast, but it needs some mathematical foundation.
4. Professional software or spreadsheet software, such as Microsoft Excel, can directly use the built-in IRR function for calculation.
III. Formula of internal rate of return for the period
Suppose an investment project has N periods, the cash flow of each period is CF1, CF2,..., CFN respectively, the initial investment cost is I, and the internal rate of return (IRR) of the period can be calculated by the following formula:
The formula explains that NPV = Σ (CFt / (1 + IRR) ^ t)-I project net present value (NPV) is equal to the sum of the discounted cash flow of each period minus the initial investment cost. IRR = solve (NPV = 0) Internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of the project equal to zero.In practical application, investors can choose the appropriate calculation method according to the specific conditions of the project, in order to obtain a more accurate period of internal rate of return. At the same time, it should be noted that the period internal rate of return is only applicable to projects with stable cash flow, and other evaluation indicators may need to be used for projects with large cash flow fluctuations.
Through the above introduction, I believe investors have a clear understanding of how to calculate the period internal rate of return and the related formula. In the actual investment process, investors can evaluate and select the project according to the specific situation of the project and the index of internal rate of return during the operation period.