Internal rate of return is the discount rate that the total present value of capital inflow is equal to the total present value of capital flow, that is, the net present value of [Zhang 1] is equal to zero. Internal rate of return (IRR) is the expected rate of return on investment, and the bigger the index, the better. It is generally used to evaluate the attractiveness of project or product investment. When the internal rate of return is greater than or equal to the benchmark rate of return, the project is feasible. If the internal rate of return of the project is lower than the current bank interest rate, it may be more profitable to deposit money in the bank than to invest in the project.

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. The internal rate of return is particularly important for projects with long payback period. For example, the payback period of hotel construction investment is about 10- 15 years, and the operation period of large-scale tourism development investment is more than 30 years. This is the most popular and practical significance of internal rate of return application.

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.

When using IRR method to make investment decision, the decision criteria are: IRR is greater than the minimum investment return rate or capital cost required by the company, and the scheme is feasible; IRR is less than the minimum return on investment required by the company, and the scheme is not feasible. If it is a comparative choice of multiple mutually exclusive schemes, the higher the internal rate of return, the better the investment benefit. The advantage of internal rate of return method is that it considers the actual rate of return of investment scheme and the time value of funds; The disadvantage is that the calculation process is complicated and tedious.

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 judgment basis. For them, the internal rate of return indicator is an indispensable tool.