Until you find a discount rate with a net present value equal to or close to zero. Internal rate of return (IRR) is the expected rate of return on investment and the discount rate that makes the net present value of investment projects equal to zero.
It is the expected rate of return of an investment, and the bigger the index, 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 discounted cash flows of investment projects in each year is the net present value of the project.
The discount rate when the net present value is zero is the internal rate of return of the project. In the project economic evaluation, according to the different levels of analysis, the internal rate of return can be divided into financial internal rate of return (FIRR) and economic internal rate of return (EIRR).
Extended data:
Where:? Firr-financial internal rate of return;
Ci- cash inflow
Common cash outflow
-The first one? t？ Current net cash flow
N—— project calculation period
When the initial investment of a construction project is equal to the annual net cash flow of the project, the calculation process of the financial internal rate of return is as follows:
1) Calculate the present value coefficient of annuity (p/A, FIRR, n) = k/r;
2) Look up the annuity present value coefficient table and find two adjacent coefficients (p/A, i 1, n) and (p/A, i2, n) and the corresponding i 1, i2, which satisfies (p/A, il, n) > k/r >; (p/A，i2，n)；
3) Calculate FIRR by interpolation (interpolation method):
(FIRR-I)/(i 1—i2)=[K/R-(p/A，I 1，n) ]/[(p/A，I2，n)—(p/A，il，n) ]
If the cash flow of a construction project is normal, the calculation process of the financial internal rate of return is as follows:
1) First, determine an initial discount rate ic according to experience.
2) Calculate the financial net present value FNpV(i0) according to the cash flow of the investment scheme.
3) if FNpV(io)=0, FIRR = io；; ;
If fnpv (io) >; 0, continue to increase IO;
If fnpv (io) < 0, continue to reduce io.
4) repeat step 3) until two discount rates i 1 and I2 satisfying FNPV (i 1) > are found; 0，FNpV(I2)& lt； 0, in which i2-il generally does not exceed 2%-5%.
5) Approximate calculation of FIRR by linear interpolation formula. Its calculation formula is:
(FIRR-i 1)/(I2-i 1)= npv 1/(NPV 1-NP v2)
Baidu Encyclopedia-Internal Rate of Return