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Internal Rate of Return
 

The IRR - the net present value approaches zero






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Installment Credits:84091  
Net Present Values:73613  
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Computation of the internal rate of return(IRR)

The fundamental calculation of interest

On the previous page I have tried to explain how the net present value (NPV) of a sequence of payments is calculated from a comparison net yield and the dates of the payments.

To compute the yield of a security we have to do many calculations of the net present value. We thereby have to find that comparison yield where the NPV of the security is zero. This is the net yield of the security.

The formula of the net present value was:
                N
NBW(B, t, r) = Sum B[i]/(1+r)^t[i]
               i=0

                       
The NPV should become zero. Unfortunately one cannot solve and compute this equation easily after r. One must start with a value of r and change it in such a way, that the NPV approaches zero. Repeating a calculation many times to find a maximum or minimum is called iteration or a iterative procedure. With this procedure one can receive the net yield from payment sequences that follows no rules. The net yield is a very good measure for the success of investments. Naturally, this method has also its limitations.

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Encyclopedia
  Analysis - Internal Rate of Return (IRR)
  Internal rate of return (IRR)
  Return on Investment (ROI)



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