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triplezeroroulette| What are the methods for calculating net present value and internal rate of return?

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Calculation method of net present value and Internal rate of return

In the field of investment and financial management, net present value (NPV) and internal rate of return (IRR) are two very important concepts, which can help investors evaluate the profitability and investment return of the project. This paper will introduce in detail the calculation methods of these two indicators and how to use them to make investment decisions.

I. calculation method of net present value (NPV)

The net present value refers to the net value of the discounted cash inflow of the project investment minus the initial investment. To put it simply, it is to convert the future cash flow to the present according to a certain discount rate, and then subtract the investment cost. The calculation formula is as follows:

NPV = ∑ (CFt / (1 + r) ^ t)-I

Where:

Parameters indicate the NPV net present value CFt period t cash flow r discount rate t time (number of periods) I initial investment

For example, suppose an investment project needs to invest 100000 yuan, and the cash flow in the next five years will be 30, 000 yuan, 40, 000 yuan, 50, 000 yuan, 60, 000 yuan and 70, 000 yuan respectively, with a discount rate of 10%. Then the net present value of the project is:

NPV = (3 / (1: 0)Triplezeroroulette.1) ^ 1) + (4 / (1x 0)Triplezeroroulette.1) ^ 2) + (5 / (10.1) ^ 3) + (6 / (10.1) ^ 4) + (7 / (10.1) ^ 5)-10 ≈ 70500 yuan

Second, the calculation method of internal rate of return (IRR)

The internal rate of return refers to the discount rate that makes the net present value of the project zero. In other words, IRR is the annualized rate of return that investors expect from the project without considering the value of time. Calculating IRR needs to be solved by iterative method, which can usually be calculated by using the IRR function of Excel. The calculation formula is as follows:

triplezeroroulette| What are the methods for calculating net present value and internal rate of return?

NPV = ∑ (CFt / (1 + IRR) ^ t)-I = 0

Use the previous exampleTriplezerorouletteWe can use the IRR function to solve the internal rate of return of the project:

IRR = IRR ({3,4,5,6,7},-10) ≈ 18.48%

Third, how to use NPV and IRR to make investment decisions

In the actual investment decision-making process, investors can judge the feasibility of the project according to the calculation results of NPV and IRR. Generally speaking, if NPV is greater than 0, it means that the cash inflow of the project is greater than the investment cost, and the project is feasible.TriplezerorouletteIf the IRR is greater than the expected rate of return of investors, it means that the income level of the project is high and it is worth investing.

It should be noted that NPV and IRR are not absolute investment evaluation criteria, and investors also need to make a comprehensive judgment based on the actual situation of the project, market environment and other risk factors.

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