Irr or internal rate of return, Finance Basics

IRR or Internal Rate of Return

This method is a discounted cash flow technique that uses the principle of NPV.  It is described as the rate such equates the present value of cash outflows of an investment to the initial capital.

IRR = Pv (cash inflows)

     = Pv(cash outflows) or

IRR is the cost of capital when as NPV = 0.

It is also identified internal rate of return since it depends completely on the outlay of investment and proceeds associated along with the project and not a rate determined outside the venture.

IRR = C = A1 / (1+r)1 + A2/(1+r)2 + A3 / (1+r)3 + ... AN / (1+r)N

A = inflow for each period

C = Cost of investment

The value r can be found via:

i) Trial and error

ii) Via interpolation

iii) Via extrapolation

Posted Date: 1/31/2013 12:58:01 AM | Location : United States

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