Internal rate of return (IRR) refers to the actual expected rate of return of project investment. In essence, the discount rate can make the net present value of the project equal to zero. That is, considering the time value, the present value of cash flow generated by an investment in the future is exactly equal to the rate of return when considering the investment cost.

Internal rate of return (IRR) is the basic index to reflect the economic effect of engineering projects. Refers to the discount rate that the cumulative present value of net cash flow of investment projects is equal to zero during the construction and production service period. This analysis method considers the time value of funds and can measure the profitability of each scheme, so it is one of the important methods for investment prediction and analysis.

Second, the scope of application of internal rate of return

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

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Practical significance of internal rate of return

Internal rate of return (IRR) is a macro-conceptual indicator, which is usually understood as the ability of project investment income to resist currency depreciation and inflation. For example, the internal rate of return is 65,438+00%, which means that the project can bear the maximum currency depreciation of 65,438+00% or inflation of 65,438+00% every year during its operation.

At the same time, the internal rate of return also indicates the ability to resist risks during the project operation. For example, the internal rate of return is 10%, which means that the maximum risk that the project can bear every year during the operation is 10%. In addition, if the project needs loans, the internal rate of return can represent the maximum allowable interest rate. If the loan interest is included in the project economic accounting, it means the maximum floating value of the loan interest in the future project operation.

For example, if the internal rate of return is based on 8%, suppose the inflation rate is around 8%. If it is equal to 8%, it means that after the project is completed, there is no money except the "salary" that "oneself" takes, but it is still feasible. If it is less than 8%, it means that there is a high possibility of loss when the project is completed.

Because of inflation, the money you earn in the future may not be worth the cost you put in now. The internal rate of return is particularly important for projects with long payback period. For example, the general investment payback period of hotel construction is about 10- 15 years, and the investment operation period of large-scale tourism development is more than 50 years. This is the most popular and practical meaning of internal rate of return.

References:

Internal rate of return-Baidu Encyclopedia