What Is Internal Rate of Return?
The IRR is the discount rate at which the net present value is exactly zero; it comes only from the deal's own payments.
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1.What is the internal rate of return?
The IRR is the discount rate at which the net present value is exactly zero; it comes only from the deal's own payments.
2.What do you compare the IRR with?
You compare the IRR with a minimum rate, the hurdle rate; no discount rate needs to be chosen first.
3.For the bakery deal, what is the present value of 550 and 605 at 5 percent compared with the 1,000 paid?
At 5 percent the payments are worth about 1,073, 73 more than paid; at 15 percent about 936, 64 less.
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Sources (2)
- Investment Analysis Methods: A practitioner's guide (NIST AMS 200-5, D. S. Thomas) (National Institute of Standards and Technology (NIST), Applied Economics Office)
- Eigene Rechnung: synthetische Zahlungsreihe -1000 / +550 / +605
Education only. Not financial advice.