eliteslots| How to calculate the incremental internal rate of return? What is the calculation principle of the incremental internal rate of return?

How to calculate the increment internal rate of return?

Internal rate of return (Internal Rate of Return, referred to as IRR) is an important index to evaluate the financial benefits of investment projects. When making investment decisions, it is very important for investors to know how to calculate the increment internal rate of return. This article will give you a detailed introduction to the principle and specific steps of calculating the internal rate of return of additions.

I. the principle of calculating the internal rate of return of increments

Increment internal rate of return (IRR) refers to the discount rate that the net present value (NPV) brought by an incremental investment is 00:00 in an investment project. In other words, when investors add additional investment to the original investment project, the internal rate of return of this additional investment can help investors to judge whether the investment is financially attractive or not.

The principle of calculating the internal rate of return of increments is based on the concept of net present value. NPV is the difference between future cash inflows and cash outflows and discounts them to the current point in time. When the net present value of the value-added investment is 00:00, the corresponding discount rate is the internal rate of return.

Second, how to calculate the internal rate of return of increments

To calculate the incremental internal rate of return, you first need to understand the cash flow of the investment project. Cash flow includes project investment, operating income, cost and so on. The following are the specific steps for calculating the internal rate of return of incrementsEliteslots:

oneEliteslots. Collect project cash flow dataEliteslotsIncluding initial investment, operating income, operating costs and so on. For incremental investment, the cash inflow and outflow data brought about by the increase need to be collected separately.

twoEliteslots. Determine the discount rate: select an initial discount rate, usually 0 or the average cost of the project as the starting value.

3. Calculate NPV: use the selected discount rate to discount future cash flows to the current point and calculate NPV. The specific calculation formula is: NPV = ∑ (CF_t / (1 + r) ^ t)-I, where CF_t represents the cash flow of the t period, r represents the discount rate, t represents the time period, and I represents the initial investment.

4. Adjust the discount rate: according to the calculated net present value, gradually adjust the discount rate until the net present value is close to zero. This process can be realized by iterative method, Newton method and other mathematical methods.

5. The results show that when the NPV is close to 00:00, the corresponding discount rate is the internal rate of return of the value-added investment.

III. Demonstration of examples

In order to help you better understand how to calculate the internal rate of return of increments, we demonstrate it through a simple example. Suppose investors consider adding a new equipment to the existing production line, the investment cost of the equipment is 1 million yuan, it is expected to bring additional income of 300000 yuan per year, the operating cost is 100000 yuan, and the duration of the project is five years.

Based on the above data, we can draw the following cash flow table:

Time (year) Cash flow (ten thousand yuan) 0-110 1 20 2 20 3 20 4 20 5 20

Through the iterative method or other mathematical methods, we can find that the internal rate of return of the additional investment is 15%. This means that the net present value of the added investment is close to zero at a discount rate of 15 per cent. Investors can judge whether the investment is attractive or not according to their own required rate of return on investment.

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