What is the use of internal rate of return?

Question 1: Please explain in easy-to-understand terms what "internal rate of return" means? I'm not a finance person and I don't understand. Please don't explain it in professional terms. For example, if a project has a total investment of 100,000 and the investment is recovered in 20 years, the internal rate of return is 5%. If the investment is recovered in 5 years, it will be 20%.

Question 2: What are the benefits of internal rate of return? Hello classmate, I am happy to answer your questions!

Gordon Online School will answer for you:

The advantage of the internal rate of return method is that it can link the income during the life of the project with its total investment, indicating the rate of return of the project, which is convenient for Compare it with industry benchmark investment returns to determine whether the project is worth building. When borrowing is used for construction, and the borrowing conditions (mainly interest rates) are not very clear, the internal rate of return method can avoid the borrowing conditions and first obtain the internal rate of return as the upper limit of the acceptable borrowing rate. However, the internal rate of return represents a ratio, not an absolute value. A plan with a lower internal rate of return may have a larger net present value due to its larger scale, and therefore is more worthy of construction. Therefore, when selecting various options, the internal rate of return and the net present value must be considered together.

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Question 3: What is the internal rate of return IRR? It is the rate of return when the net present value is equal to 0

Question 4: What is internal rate of return? Internal rate of return. First of all, you must know what "internal" is. There is an assumption that income is obtained by relying on its own funds and excluding external financing. It is the self-economic power of the enterprise. Measurement of development level.

It is said in many understandings that it is the discount rate. It is indeed difficult to understand this concept. The easiest way to draw this conclusion is to divide it into two steps.

The first step is that the internal rate of return is your benchmark rate of return. The key to whether you use a fund is whether the expected rate of return of the fund is higher than your benchmark rate of return (to be precise, it is not lower than it. ).

The second step is to discount the total income (or the sum of principal and interest) obtained from the funds used. The discount rate is your benchmark rate of return to obtain the discounted value and Present value comparison.

(Obtain discounted value - the present value of the funds you hold) / the present value of the funds you hold = internal rate of return.

In this way, internal rate of return. The higher the rate of return, the better.

Internal rate of return is a macro concept indicator. The most popular understanding is the ability of the project's investment income to withstand currency depreciation and inflation. For example, the internal rate of return is 10%. The project can withstand a maximum currency depreciation of 10% or inflation of 10% each year during operation.

At the same time, the internal rate of return also indicates the ability to resist risks during the project operation. For example, an internal rate of return of 10% means that the project can withstand risks. The maximum annual risk that can be tolerated during the project operation is 10%. In addition, if a loan is required during the project operation, the internal rate of return can represent the maximum affordable interest rate. If the loan interest is included in the project economic calculation, it represents the future project operation process. The maximum increase in loan interest.

Normally, we use 8% as the benchmark. The reason is that my country’s inflation rate has been between 7-8% in recent years (official data is 4-5%). If it is equal to 8%, it means that when the project operation is completed, there will be no money except the "salary" earned by "himself", but if it is lower than 8%, it means that there is a high possibility when the project operation is completed. It's a loss. Because of inflation, the money you make in the future may not cover the cost you invest now. The internal rate of return indicator is particularly important for projects with a long investment return period.

For example, the general investment recovery period for hotel construction is about 10-15 years, and the investment and operation period for large-scale tourism development is more than 50 years. This is the most popular and practical meaning of internal rate of return.

Question 5: What is internal rate of return? What is the definition of internal rate of return? The English name of internal rate of return: internal rate of return, IRR refers to: the sum of the discounted present values ??of the cash flows of the investment project in each year is the net present value of the project, and the discount rate when the net present value is zero is the internal rate of return of the project < /p>

The internal rate of return is the rate of return when the present value of the cash flow generated by an investment in the future is exactly equal to the investment cost, taking into account the time value, rather than the "regardless of whether it is high or low" as you think The net present value is zero, so it doesn’t matter whether it’s high or low.” This is putting the cart before the horse. Because the premise of calculating the internal rate of return is to make the net present value equal to zero. To put it simply, the higher the internal rate of return, it means that the cost you invest is relatively small, but the benefits you get are relatively large. For example, the investment costs of A and B are both RMB 100,000 and the operating period is 5 years. A can earn a net cash flow of RMB 30,000 per year and B can earn RMB 40,000. Through calculation, it can be concluded that A's internal rate of return is approximately equal to 15%, B's is approximately equal to 28%, these can actually be seen through the annuity present value coefficient table.

Question 6: What does Internal Rate of Return (IRR) refer to? Internal Rate of Return (IRR) means that the total present value of capital inflows is equal to the total present value of capital outflows, and the net present value The discount rate is equal to zero. If you do not use a computer, the internal rate of return needs to be calculated using several discount rates until you find the discount rate at which the net present value is equal to zero or close to zero. The internal rate of return is the rate of return that an investment aspires to achieve, and it is the discount rate that can make the net present value of the investment project equal to zero.

It is the rate of return that an investment aspires to achieve. The bigger the indicator, the better. Generally speaking, the project is feasible when the internal rate of return is greater than or equal to the benchmark rate of return. The sum of the discounted present values ??of the investment project's cash flows in each year is the project's net present value, and the discount rate when the net present value is zero is the project's internal rate of return. In project economic evaluation, depending on the level of analysis, the internal rate of return can be divided into financial internal rate of return (FIRR) and economic internal rate of return (EIRR).

At present, investment methods such as stocks, funds, gold, real estate, and futures have been familiar and used by many financial managers. However, many people's understanding of the effectiveness of investment is limited to the absolute amount of income, lacking scientific basis for judgment. For them, the internal rate of return (IRR) indicator is an indispensable tool.

It is recommended to refer to Baidu Encyclopedia, link: baike.baidu/...PkqSZq

Question 7: What is the relationship between annualized rate of return and internal rate of return? Is there any difference? Depends on where you use this thing. From a digital perspective, they can be treated as the same.