How to calculate the incremental internal return on investment? Master IRR computing skills!
Incremental internal return on investment (Incremental Internal Rate of Return, Δ IRR) is the evaluation of investment projects, especially when comparing multiple mutually exclusive investment projectsFunclubcasinofreespinsAn important indicator of. When comparing investment projects, we usually pay attention to the Net Present Value (NPV) of the project. When the cash flow of the two projects is different, Δ IRR becomes a key measure. This article will describe in detail how to calculate the incremental rate of return on internal investment and related calculation skills.
1. Calculation of incremental cash flow (Δ CF)
Before calculating Δ IRR, we need to determine the incremental cash flow of the two investment projects. Incremental cash flow refers to the difference in expected cash flow between two projects. The specific calculation method is as follows:
Project A Cash flow Project B Cash flow incremental Cash flow (Δ CF) CF1A CF1B Δ CF1 = CF1A-CF1B CF2A CF2B Δ CF2 = CF2A-CF2BFunclubcasinofreespins.........And so on, we need to calculate the incremental cash flow for each period.
Second, calculate Δ IRR
After getting the incremental cash flow, we need to find a discount rate so that the present value of the incremental cash flow is zero. The discount rate is the incremental return on internal investment. The calculation steps are as follows:
Calculate the present value of incremental cash flow for each period (Δ CF/ (1 + delta IRR) ^ n), where n represents the period. Through trial and error or other numerical methods (such as Newton method, dichotomy, etc.), we gradually approach the value of Δ IRR until the present value of incremental cash flow is close to zero.Third, the application of Δ IRR
When comparing two mutually exclusive investment projects, we can make decisions based on Δ IRR. If the Δ IRR is greater than the company's cost of capital (WACC) or other predetermined minimum rate of return, then the project with higher incremental benefit should be chosen. On the contrary, if the Δ IRR is lower than the predetermined minimum rate of return, then the investment project should be abandoned.
IV. matters needing attention
When calculating Δ IRR, ensure that the cash flow data used are accurate. When the incremental cash flow is positive and negative alternately, Δ IRR may have multiple solutions. At this point, you may need to further analyze the risks and benefits of the project. Δ IRR can only be used for mutually exclusive investment projects. For independent investment projects, it is still necessary to use NPV, internal rate of return (IRR) and other indicators to evaluate.Through the above steps and matters needing attention, investors can quickly master the calculation skills of incremental internal investment rate of return and play an important role in the actual investment decision.
