# Internal rate of return - a key indicator of the efficiency of investment.

any decision on investment necessarily involves the assessment of effectiveness.This is understandable, since it is necessary to define the criteria that will enable to choose the most profitable projects.Most often, investors use the system of indicators to assess the economic efficiency of capital investments.Almost all of these indicators are subjective, since they depend on the decisions of the person who carries out the calculations.Objective indicator is only an IRR - internal rate of return, since it is determined solely by performance of the project, regardless of investor relations.Let us discuss it in more detail.

This indicator determines the level of profitability, which is inherent in a particular project, that is to "squeeze" a large margin is not possible.But the main practical significance lies in the fact that the internal rate of return limits the maximum price of the capital, who are involved in the project.For example, in the IRR of 10% to take a bank loan at 15% definitely not wor

th it, because we do not pay interest and do not make a profit.

Compare internal rate of return is possible not only to the price of capital, and the desired yield or profitability of alternative projects.Of the two projects is the most profitable, IRR is greater.And if you want to receive from the project 10% of the profit, you can take a loan at 10% and the internal rate of return determined at 20%, then you can safely proceed to implementation.

need to focus on how the internal rate of return is determined.The essence of the calculations is that the need to find a discount rate at which the net cost of the project will be equal to zero, ie, the sum of the discounted earnings will cover the discounted investments.In practice, using various methods.The easiest way to use specialized software for the evaluation of investment or business plans.The software product MS Excel also has a function that calculates IRR based on cash flow.

somewhat more labor-intensive methods that can be used without a PC are graphics and search for solutions linenynaya interpolation.The graphic method consists in the image in the coordinate plane according to NPV (net present value) by the discount rate.The point of intersection of the graph with the horizontal axis, and will characterize the value of IRR.

calculation by linear interpolation implies a finding of two values ​​NPV - positive and negative - at different discount rates.Next, a determination of the level of the rate at which the NPV reaches zero, assuming a linear dependence.

The above method allows the determination of the IRR for the project, which describes the Conventional cash flow.The peculiarity of this flow is that investments are made at the beginning of the project, and then the process of making a profit.Obviously, not all designs can be realized in this way, some of them require investments and after profit occurs.As already noted, for such projects with non-classical cash flow IRR indicator used is difficult.In connection with these it was to develop indicators MIRR - modified internal rate of return.Its use allows to take into account the particular nekonventsialnyh streams and most objectively assess the internal rate of return.

importance described indicator is difficult to overestimate, so its calculation must be compulsorily included in the assessment of the economic efficiency of investments.Depending on the characteristics of the project must be selected or IRR, or MIRR.

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