Comments on: How to calculate an internal rate of return (IRR), and when not to use it http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/ Because you shouldn't need an MBA to be savvy about finance and business Thu, 09 Feb 2012 01:13:00 +0000 hourly 1 http://wordpress.org/?v=abc By: michelle stuart http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-300875 michelle stuart Wed, 01 Feb 2012 17:11:29 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-300875 •Explain the effect of a sales volume increase on the total fixed costs, unit fixed costs, total variable cost, and unit variable cost. •Discuss the effect of a volume increase in sales, a price increase in sales, and a cost decrease on the net operating income (in regards to manufacturing a new product line) •Explain the effect of a sales volume increase on the total fixed costs, unit fixed costs, total variable cost, and unit variable cost.
•Discuss the effect of a volume increase in sales, a price increase in sales, and a cost decrease on the net operating income
(in regards to manufacturing a new product line)

]]> By: KIKI http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-291816 KIKI Mon, 26 Dec 2011 10:36:34 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-291816 Would you advise where can i find the answer of the above questions? THANKS Would you advise where can i find the answer of the above questions? THANKS

]]> By: Basula Anatoli http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-275885 Basula Anatoli Sat, 22 Oct 2011 12:23:31 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-275885 I really appreciate your effort keep it up I really appreciate your effort keep it up

]]> By: gerald http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-275634 gerald Fri, 21 Oct 2011 13:39:08 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-275634 could you kindly refer me to where you have solved the above quetion posted could you kindly refer me to where you have solved the above quetion posted

]]> By: Allhyn http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-261465 Allhyn Thu, 18 Aug 2011 05:57:19 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-261465 I am confused with the term "in flow and out flow". Here's the case. I am to compute the IRR of new project. Their initial capital is not sufficient for the Project cost so investors are opt to have a loan from the Bank. My questions are: 1. Will I include the loan amount in my computation of IRR? 2. If yes, does it means Principal and Interest? 3. If no, how about the Interest Exp, will I include in Cash outflow? Thank you so much I am confused with the term “in flow and out flow”.
Here’s the case.
I am to compute the IRR of new project.
Their initial capital is not sufficient for the Project cost so investors are opt to have a loan from the Bank. My questions are:
1. Will I include the loan amount in my computation of IRR?
2. If yes, does it means Principal and Interest?
3. If no, how about the Interest Exp, will I include in Cash outflow?

Thank you so much

]]> By: vicente http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-247771 vicente Wed, 30 Mar 2011 04:39:47 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-247771 So, Does negative IRR exists or not !?!?!?!? So, Does negative IRR exists or not !?!?!?!?

]]> By: raunak http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-245940 raunak Tue, 01 Mar 2011 18:16:09 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-245940 For a product which has just been phased out,i.e, come to the end of its selling life, explain how you would determine the value of the IRR which had been achieved? For a product which has just been phased out,i.e, come to the end of its selling life, explain how you would determine the value of the IRR which had been achieved?

]]> By: Brian Rutter http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-245536 Brian Rutter Wed, 23 Feb 2011 05:54:41 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-245536 Let me make a few points on the IRR discussion. First, a bit of history might make it more clear why the IRR method was adopted in the first place, and why it is probably not the best tool for corporate capital budgeting. The IRR was developed first in the Bond market. With bonds, periodic cash flows and terminal values are known with relative certainty. Apart from the initial purchase price, there are no negative cash flows to deal with, thus eliminating the situation where you can have more than one valid IRR for a project. Since bonds usually trade at a premium or discount to their face value, the IRR is a good tool to tell you the return you are making on your actual investment, as distinct from the nominal interest rate on the bonds. When you start moving away from this simple scenario, you start getting more problems. However, the IRR is still appealing in the investment world because it gives you a simple means of comparing projects of different scale, while the NPV is heavily impacted by the size of the project. To answer some of the questions from earlier comments, where you do not know the future cash flows with any degree of certainty, you should use some form of sensitivity analysis. That is, you derive your best estimate of the cash flows, and calculate the IRR on those. Then, you vary those cash flows up and/or down throughout what seems a reasonable range. Some people use 3 scenarios, a best estimate, an optimistic scenario, and a pessimistic scenario. I would say that the greater your uncertainty, the more different scenarios you should look at. You will have a range of IRR's which should cover what will actually happen. Now, the finance text books will tell you to assign probability estimates to each scenario, and then you can calculate the probability that the actual IRR will be above a given level. However, I believe that if you are that uncertain about what the cash flows will be, those probability estimates will be essentially useless. Remember, that technique is what led Lehman Brothers, Morgan Stanley et. al. to believe they had adequate capital reserves. One questioner was trying to include depreciation in his calculations. Remember, both NPV and IRR are cash flow concepts. You would not include depreciation, because depreciation is an allocation of up-front costs over the period in which the benefits are expected. You have already accounted for your initial investment as an initial cash outflow. Reducing future inflows by depreciation is double counting the initial investment. And just out of curiosity, how many of those questions which gave very specific scenarios were test questions from finance courses? Let me make a few points on the IRR discussion. First, a bit of history might make it more clear why the IRR method was adopted in the first place, and why it is probably not the best tool for corporate capital budgeting. The IRR was developed first in the Bond market. With bonds, periodic cash flows and terminal values are known with relative certainty. Apart from the initial purchase price, there are no negative cash flows to deal with, thus eliminating the situation where you can have more than one valid IRR for a project. Since bonds usually trade at a premium or discount to their face value, the IRR is a good tool to tell you the return you are making on your actual investment, as distinct from the nominal interest rate on the bonds.
When you start moving away from this simple scenario, you start getting more problems. However, the IRR is still appealing in the investment world because it gives you a simple means of comparing projects of different scale, while the NPV is heavily impacted by the size of the project.
To answer some of the questions from earlier comments, where you do not know the future cash flows with any degree of certainty, you should use some form of sensitivity analysis. That is, you derive your best estimate of the cash flows, and calculate the IRR on those. Then, you vary those cash flows up and/or down throughout what seems a reasonable range. Some people use 3 scenarios, a best estimate, an optimistic scenario, and a pessimistic scenario. I would say that the greater your uncertainty, the more different scenarios you should look at. You will have a range of IRR’s which should cover what will actually happen. Now, the finance text books will tell you to assign probability estimates to each scenario, and then you can calculate the probability that the actual IRR will be above a given level. However, I believe that if you are that uncertain about what the cash flows will be, those probability estimates will be essentially useless. Remember, that technique is what led Lehman Brothers, Morgan Stanley et. al. to believe they had adequate capital reserves.
One questioner was trying to include depreciation in his calculations. Remember, both NPV and IRR are cash flow concepts. You would not include depreciation, because depreciation is an allocation of up-front costs over the period in which the benefits are expected. You have already accounted for your initial investment as an initial cash outflow. Reducing future inflows by depreciation is double counting the initial investment.
And just out of curiosity, how many of those questions which gave very specific scenarios were test questions from finance courses?

]]> By: DEBRAJ HALDAR http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-242660 DEBRAJ HALDAR Wed, 19 Jan 2011 05:42:39 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-242660 My IRR for a mini truck loan is 17...please calculate my rate of interest .......... My IRR for a mini truck loan is 17…please calculate my rate of interest ……….

]]> By: DEBRAJ HALDAR http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-242658 DEBRAJ HALDAR Wed, 19 Jan 2011 05:40:36 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-242658 Please send me details about IRR formula for car loan and how to calculate the formula for car loan ........... Please send me details about IRR formula for car loan and how to calculate the formula for car loan ………..

]]> By: guffran Ali http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-238064 guffran Ali Sun, 28 Nov 2010 16:17:52 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-238064 i am very thankfull for having so much knowledge about irr after reading thismaterial i am very thankfull for having so much knowledge about irr after reading thismaterial

]]> By: realbench http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-232996 realbench Mon, 30 Aug 2010 15:25:51 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-232996 I personally used the internal rate of return mainly to rank several prospective real estate investments. Help me flush out bad investments and pick the most desirable when considering multiple ones. Your post gives me another angles on how to employ it in other areas I had overseen. Good post I personally used the internal rate of return mainly to rank several prospective real estate investments. Help me flush out bad investments and pick the most desirable when considering multiple ones. Your post gives me another angles on how to employ it in other areas I had overseen.

Good post

]]> By: Faisal http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-232977 Faisal Mon, 30 Aug 2010 08:56:20 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-232977 Dear, NIGAM Ur IRR is 18% and NPV is £ 63,343.48 Dear, NIGAM

Ur IRR is 18% and NPV is £ 63,343.48

]]> By: Faisal http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-231779 Faisal Wed, 11 Aug 2010 05:55:49 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-231779 I'm having a IRR of 74% of my new project. is it possible to have IRR of 74%? I’m having a IRR of 74% of my new project. is it possible to have IRR of 74%?

]]> By: Nigam http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/comment-page-1/#comment-230420 Nigam Sat, 26 Jun 2010 12:30:58 +0000 http://www.experiglot.com/2006/08/09/how-to-calculate-an-internal-rate-of-return-irr-and-when-not-to-use-it/#comment-230420 can u please give me the answer of the following question? My initial investment £449,400 Annual Net Cash Flaw £100,000 Cost of Capital 14% Length 10 years So, how much are IRR and NPV? Please possible to write down how u calculate because i am new in these sector. can u please give me the answer of the following question?

My initial investment £449,400
Annual Net Cash Flaw £100,000
Cost of Capital 14%
Length 10 years
So, how much are IRR and NPV?

Please possible to write down how u calculate because i am new in these sector.

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