what is the difference between IRR and ROI?

Question

Could someone explain briefly each one?

Answer 1

I assume you're referring to Internal Rate of Return and Return on Investment.

Investopedia says:
IRR

Often used in capital budgeting, it's the interest rate that makes net present value of all cash flow equal zero. Essentially, this is the return that a company would earn if it expanded or invested in itself, rather than investing that money elsewhere.

ROI

A performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

ROI=(Gain from Investment - Cost of Investment)/Cost of Investment

Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Keep in mind that the calculation for return on investment can be modified to suit the situation -it all depends on what you include as returns and costs. The term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation. For example, a marketer may compare two different products by dividing the revenue that each product has generated by its respective expenses. A financial analyst, however, may compare the same two products using an entirely different ROI calculation, perhaps by dividing the net income of an investment by the total value of all resources that have been employed to make and sell the product.

This flexibility has a downside, as ROI calculations can be easily manipulated to suit the user's purposes, and the result can be expressed in many different ways. When using this metric, make sure you understand what inputs are being used.

Answer 2

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The IRR is really nothing more than the future value formula applied to every cash flow. The most common method is to describe all the cash flows as a present value but it's also possible to describe every cash flow as a future value. Describing your problem with the assumption that the $4,000 are a the end of the month, in terms of a present value is: $1,500,000 = $4,000 / ( 1 + R )^( 1 / 12 ) ) + $4,000 / ( 1 + R )^( 2 / 12 ) + $4,000 / ( 1 + R )^( 3 / 12 ) + ... + $4,000 / ( 1 + R )^( 44 / 12 ) Note that 1 / ( 1 + R )^( n / 12 ) = ( 1 / ( 1 + R )^( 1 / 12 ) )^n and the above terms are a geometric series therefore to avoid having 44 cashflow terms, applying the summation of a finite geometric series formula gives you: $1,500,000 = $4,000 * ( ( 1 - 1 / ( 1 + R )^( ( 44 + 1 ) / 12 ) ) / ( 1 - 1 / ( 1 + R )^( 1 / 12 ) ) - 1 ) Now it's customary to move the original investment onto the right hand side to do a roots of a polynomial since most IRR's can not be simplified with a geometric sequence and one that is simplified is still a polynomial. This has given rise to many people saying an IRR is when the net present value is zero which is obviously not true as the present value has simply been moved over to a negative cash flow at time 0, but the statement has proven an effective means of describing the process to the mathematically challenged. With the move it's: 0 = -$1,500,000 +$4,000 * ( ( 1 - 1 / ( 1 + R )^( ( 44 + 1 ) / 12 ) ) / ( 1 - 1 / ( 1 + R )^( 1 / 12 ) ) - 1 ) As it's still a polynomial, this has to be solved by numeric methods. The binary method gives me: R = -59.89% Therefore the ROI of this for 44 months is -59.89%, note the loss. As you can see 44 payments of $4,000 is $176,000, no where's near the $1,500,000 invested so this deal couldn't possibly make money over 44 months unless the property was sold for a sufficient reclaim value. Also note that the present form method has trouble when the rate is 0% so you have to start the analysis with a negative number as a first guess when it's likely to be a loss or it will never find a suitable answer (some versions of Excels =IRR() and =XIRR() will display this problem). The rarely used future value form does not have this problem and it's surprising why the future value version isn't taught. As to ROI, technically the IRR is the ROI, however the IRR takes into consideration the time value of each cash flow whereas many people's idea of ROI erroneously don't. There is also a version of IRR called multiple IRR ( =MIRR() in excel ) whereby each outwards cash flow is invested at another rate for a future gain that may be more in keeping with some investors.

Answer 3

Roi Vs Irr

Answer 4

Irr Vs Roi

Answer 5

IRR is the rate of return by which cash inflows and outflows when discounted will return zero.Here we assume all the cash inflows reinvested into the project at rate equal to IRR.
While ROI is much broader concept. Here it all depends on what you include as returns and costs.The term in the broadest sense just attempts to measure the profitability of an investment and, as such, there is no one "right" calculation.
Thus IRR is a strictly mathematical formula(theoretical) and ROI is more practical(closer to reality). In fact IRR is one of the many ways ROI can be calculated.

Answer 6

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RE:
what is the difference between IRR and ROI?
Could someone explain briefly each one?

Answer 7

ROI is an accounting term and is usually a one period return. You calculated it bu dividing this periods return on the value invested.

IRR -- or Internal Rate of Return is the rate where if you discount all of the future cash flows, the present value of the flows is equal to the cost.

Answer 8

ROI, return on investment, is the actual return of a project.
IRR, internal rate of return, is the expected return of a project.

Answer 9

Sure thing

Answer 10

Hurrah, that's what I was exploring for! Thanks op of this question.