what's the meaning of IRR of project? how i know that this project is profitable from IRR? how i calculate IRR

Answer 1

IRR means Internal Rate of Return. If you start a project, you need to put in some capital. After the project completes, your capital will increase if the project was profitable (or decrease, if it lost money). If the project turned $1 million into $2million in one year, that's obviously better than if it turned $1 million into $2 million in 5 years. IRR measures the rate of growth (rate of return). The 'internal' comes from the fact that the capital in re-invested, that is, not taken out, till the end of the project.

If the IRR is positive, the project is profitable. However, the lender (bank or venture capitalist) will want to know how profitable the project is. If they can get 5% interest in some other investment while your project gives them only 4%, obviously they won't lend you the money. So the IRR is a way to compare the profitability of different projects. Lenders want to see the highest IRR for a given level of risk.

You can calculate IRR by using a financial calculator, the IRR function in Excel, or using the IRR calculator on any good financial website.

Answer 2

IRR stands for Internal Rate of Return. First you calculate the expected cash flows of the project. Then you need to discount those cash flows to get a present value. The IRR is the discount rate that makes the present value of the cash flows equal to the cost of the project.

It is similar ot the yield of a bond (the yield is actually an IRR).

Calculating the IRR is an iterative process. First you guess. Then if your PV is too high, you choose a higher guess. If it is too low, you choose a lower IRR. Excel's SOLVER function can be used to find the answer.

As for knowing if the project is profitable or not, you compare the IRR to the "hurdle rate." The hurdle rate is the rate that reflects the risk of the project. You can calculate the hurdle rate using the beta of the project and the Capital Asset Pricing Model. If you don't know how to do this, I suggest that you take an introductory finance class somewhere.

Finally, the IRR rule is useful for finding if a project is profitable or not, but doesn't tell you how profitable it is nor how to choose between mutually exclusive profitable projects. The Net Present Value rule is a much better rule to use.