One of the benefits of IRR is that it takes into account the time value of money. This means that future cash flows are more important than current ones. This allows investors to assess whether an investment will be profitable in the long term.
How to calculate IRR
Calculating the internal rate of return (IRR) is a key step in assessing the profitability of an investment. The first step is to determine the cash flows associated with the investment. Then, through trial and error, you can calculate the IRR, the rate of return at which the net present value (NPV) of the cash flows is zero.
How is the IRR formula calculated? To calculate the IRR, it is mexico cell phone number list important to know the NPV (net present value of the project) from the very beginning and compare it with zero. To carry out the calculation, the following IRR formulas are used:
What is IRR: Formula Calculation - Image 1
How to decipher the project IRR formula:
CF1, CF2...CFn are cash flows that relate to income, expenses and residual value;
R — discounted rate;
CF0 is the amount of initial investment.
Once we know the NPV, we can assume that it is 0 and compare this value with the internal rate of return. It is important to take into account the discount rate.
What is IRR: Formula Calculation - Image 2