Detailed explanation of the calculation method of annualized internal rate of return
Annualized internal rate of return (Annualized Internal Rate of ReturnMollysbloom(AIROR for short) is to evaluate the profitability of investment projectsMollysbloomAn important indicator of. Compared with the simple rate of return on investment, the annualized internal rate of return can more accurately reflect the return level of investment in a certain period of time. This paper will analyze the calculation method of annualized internal rate of return in detail to help investors better analyze and compare the profitability of different investment projects.
I. the concept of annualized internal rate of return
The annualized internal rate of return refers to the index of transforming the actual income of the investment project into the annual income. By calculating the annualized rate of return, investors can compare and evaluate investment projects with different periods under the same standard. The higher the annualized internal rate of return, the stronger the profitability of the investment project.
Second, the calculation method of annualized internal rate of return
The calculation of annualized internal rate of return involves initial investment, cash flow, investment period and other factors. The following are the specific calculation steps:
1. Determine the cash flow of the investment project: cash flow includes the initial investment and the income during the project period. Cash inflows and outflows that may occur during the investment process should be recorded in detail.
two。 Calculated net present value (NPV): NPV is the process of converting future cash flows into current values. According to the cash flow of the investment project, the cash inflow and outflow of each period are converted into the current value, and the net present value is obtained by adding or subtracting the initial investment.
3. Solve the internal rate of return (IRR): the internal rate of return is the discount rate that makes the net present value equal to zero. Through iterative calculation, the discount rate that makes NPV zero is found. This discount rate is the return on investment of the project.
4. Annualize the internal rate of return: convert IRR into an annualized rate of return according to the investment period. The calculation formula is: AIROR = (1 + IRR) ^ investment life-1.
III. Demonstration of examples
Suppose investor A carries outMollysbloomA 3-year investment project with an initial investment of 10%Mollysbloom, 000 yuan. Cash flows during the project period are as follows:
Year cash inflow (RMB) 1 3000 2 4000 3 5000Calculate the net present value (NPV) based on the above cash flow. Assuming that investor A requires a discount rate of 10%, you can get NPV=289.45 yuan.
Next, the IRR is solved by iterative calculation. It was found that the IRR was about 9.43%. Finally, by annualizing IRR, we get AIROR = (1 + 0.0943) ^ 3-1 ≈ 0.23, that is, the annualized internal rate of return is about 23%.
IV. matters needing attention
When calculating the annualized internal rate of return, you should pay attention to the following points:
1. Cash flow should be recorded accurately to avoid omission or repetition.
two。 When solving IRR, there may be multiple solutions, so the most suitable solution should be chosen according to the actual situation.
3. The annualized internal rate of return is suitable for the evaluation of long-term investment projects, while short-term projects need to be evaluated comprehensively in combination with other indicators.
Through the above content, investors can master the calculation method of annualized internal rate of return, and use this index to evaluate the project in the actual investment process. In order to better control the investment risk and maximize the return on investment.