Internal rate of return: What is itand how

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Rate of return (IRR) is a way of calculating the overall return on an investment. This means that it is a great tool to understand the performance of investments. So, and it can help us decide if an investment makes sense, is profitable or not . The IRR is also useful for comparing different types of assets that may have similar cash flows but different risk levels o Phone Number List time horizonsWhat is the internal rate of profitability or returnThe internal rate of return or profitability, IRR, is a measure that allows us to determine whether an investment will be profitable based on its initial outlay and its total return. It is also used to compare different investments and projects, as well as time periods and interest rates. For many authors, it is the discount rate or interest rate, which makes the net present value (NPV) or net present value (NPV) of all cash flows equal to zero

Return is the percentage of profit or loss that an investment will have, that is, its profitability . Its calculation indicates what the annual return on an investment would be if it were compounded continuously at a specific rate.Therefore, the IRR is a valuable tool for making investment decisions. But it is important to understand how it works and know how to interpret it before using it. The higher the IRR, the better an investment it will seem .However, using this method has some drawbacks , such as not taking inflation or taxes into account, which could significantly change your resultsHow to calculate the IRR of an investmenAlthough it may seem quite the opposite, calculating the internal rate of return is actually simple, if you understand how it works. To begin with, we can say that the result of this calculation is expressed as a percentage (%) . To calculate the IRR, you must subtract the initial value (cost) from the final value (sale or return on investment) of the operation, divide it by the initial value and multiply the result by 100.



As we have already said previously, the internal rate of return (IRR) presents some drawbacks that may call its results into question . We must remember that this method does not take into account inflation or taxes , for example. Likewise, it does not take into account the timing of cash flows , so, in some cases, it can give misleading results Interpretation of the IRR resulThe internal rate of return is something that must be well understood to make good financial decisions . Basically, its results can be interpreted in a simple way, the higher the IRR, the higher the profitability of the investment project is estimated . Looking at it more specifically, we have to:If the IRR is greater than or equal to the interest rate or opportunity cost, it can bassumed that the project will be profitable, so it will be accepted. In the opposite case (if it is lower), it iconsidered that the profitability of the project is below the minimum , so it is not viable.