Is this calculated on equity / investment only? Or can this also apply to any kind of debt calculation?
2006-07-24 14:03:43 · 3 answers · asked by kjhaldeman 1 in Business & Finance ➔ Other - Business & Finance
Internal Rate of Return
2006-07-24 14:06:35 · answer #1 · answered by bishop_larry 1 · 0⤊ 0⤋
It is calculated on cash flows only.
Use the Newton Method http://en.wikipedia.org/wiki/Newton_method
to estimate the IRR. Take each independent cash flow to present value.
Warning, if for every change in sign in cash flows (such as cash outflow, to inflow, to outflow, to inflow) you will have a root that is a potential answer. Answers must be checked against reality.
DO NOT USE e^rt in your calculations as the derivative of any exponential function is that same exponential function creating no solution. So if $50 went out one year into the future it is not 50E^(1*r) it is $50(1+r)^1. The later has a first derivative that will work in the algorithm the other does not.
2006-07-24 15:31:49 · answer #2 · answered by OPM 7 · 0⤊ 0⤋
The Internal Rate of Return is the estimated yield from a specified number of cash flows over time. The simplified formula is FCF/(1+IRR)^1+ FCF/(1+IRR)^2 + ... + FCF/(1+IRR)^n
The unknown variable is IRR, where you plug in FCF over n periods. You can either get it by trial and error, or use MS Excel (=IRR(array of cash flows)).
2006-07-24 15:05:29 · answer #3 · answered by J 4 · 0⤊ 0⤋