IRR IRR - is one of the key indicators of investment attractiveness of the business plan.This indicator is pay attention to the analysis of any business plan.Internal rate of return on its economic essence is a value interest rate, provided that the expected return is equal to the spent finances.In other words, the estimated rate that is equal to zero the value of the project.This indicator allows you to calculate the value of the maximum percentage, in which invested in the project funds can be returned.
Internal rate of return is determined by means of special computer programs or financial calculators.
Also, this percentage can be calculated empirically, substituting into the equation different values of discount.For these purposes, a good use of the tool "Seek" that is built into Microsoft Excel.
When the internal rate of return of the project exceeds the amount of the planned investment, or at least equal to them, such a project is accepted and is considered promising.When the indicator IRR is less than the capital invested, the project refused for reasons of unprofitability.
Thus, it can be considered a kind of internal rate of return barrier for risky projects, or those that have a low yield.
However, this rule applies only at constant yield.There are some projects that initially cause damage.But then, after some time, they go to self-sufficiency, and are beginning to show a constant profit.In this case, it will have to be patient to get a positive result from the investment.
In addition, there are projects that involve unequal receipt finance in equal periods of time.In that case, IRR rate is determined empirically, because you need to find a percentage that will lead to a zero current value.That is, there is no increase in the value of the enterprise, but its price falls.
Internal Rate of Return as an economic indicator has positive and negative aspects.The advantage of IRR is that in addition to the calculation of the level of profitability, it allows you to compare projects of different duration and different scale.When comparing the key parameters used:
- the degree of risk;
- the project implementation;
- the amount of funds invested.
However, the indicator IRR also has three major minus.
First, the calculation assumes that the rate at which positive cash flows are reinvested, equal to the internal rate of return.In that case, if the figure is close to the IRR rate of reinvestment of the enterprise, it does not cause problems.For example, the indicator IRR attractive business plan is 70%.This assumes that all income from the project will be reinvested at the rate of 70%.However, the probability that the company has the annual financial capabilities that provide a return on ukazannomurovne very small.In such circumstances, the project IRR overstates the result from investments.To address this shortcoming can also expect a modified indicator of the rate of return MIRR.
second drawback is the difficulty in determining the value of investment earnings in absolute terms (dollars, rubles).
Third, if the business plan involves alternating financial flows, that is a strong possibility of calculating an incorrect value IRR.
Note that when using IRR analyzes only those investment projects for which revenues cover costs, ie the ratio of revenues to expenditures exceeding 1. Value IRR should be compared with the value of the interest rate and the IRR in the justification of the amendment accounted for taxes, inflation andthe risks of the project.
