Internal Rate of Return (IRR) in a nutshell
Hi all, We all know that this is a place to learn from unprecedented models, methods & techniques. Today, let’s explore IRR. We all know it is a discount rate where NPV is 0. How it is derived is through these 2 formulas Or So how do we assess IRR based on cash flows? The process is straightforward. For this purpose, we have selected three different cash ‑ flow patterns across three projects: Incremental cash flows Even cash flows Uneven cash flows We often hear discussions about the timing and nature of cash flows, and that is precisely what we are going to examine here. Project A contains incremental cash flows, with annual percentage increases of 100%, 50%, 33%, 25%, 20%, 17%, 14%, and 13%. Project B consists of even cash flows, resulting in a natural annual percentage change of 0%. Project C exhibits uneven cash flows, with annual percentage changes of –300%, –30%, –243%, –200%, 0%, 20%, –125%, and –950%. The annual growth r...
