makeymakeyscratch| What is the formula for calculating the internal rate of return on incremental investment?

Calculation method of Internal rate of return of incremental Investment

In the process of investment decision-making, it is very important to evaluate the project income. Internal rate of return on incremental investment (Incremental Internal Rate of Return)MakeymakeyscratchIIRR), as an index to measure the investment benefit of a project, is affected byMakeymakeyscratchIt has attracted the attention of investors and enterprises. This paper will introduce in detail the calculation formula and related concepts of the internal rate of return of incremental investment to help readers better understand and use this tool.

I. definition of internal rate of return on incremental investment

The internal rate of return of incremental investment refers to an internal rate of return calculated by comparing the net present value (Net Present Value, NPV) of two or more projects. When the NPV of one project is larger than that of another, we can judge which project has more investment value by calculating the internal rate of return of incremental investment.

Second, the formula for calculating the internal rate of return of incremental investment

Assume that the cash flows of project An and project B are CA (t) and CB (t), respectively, and t represents time. The cash flow of incremental investment can be expressed as: Δ C (t) = CB (t)-CA (t). The net present value of incremental investment can be expressed as: Δ NPV = ∑ [Δ C (t) / (1 + IIRR) ^ t].

In order to solve IIRR, we need to find the IIRR value that makes Δ NPV equal to zero. This usually requires the help of iterative method or numerical solution, such as Newton method, dichotomy and so on.

Third, the application scenario of the internal rate of return of incremental investment

The internal rate of return on incremental investment is mainly applied to the following scenarios:

1. Project selection: when an enterprise is faced with multiple investment projects, by comparing the IIRR values of each project, the project with maximum return can be selected for investment.

two。 Project adjustment: for the projects that have been implemented, the enterprise can optimize and adjust the project according to the IIRR value to improve the investment efficiency.

3. Risk assessment: IIRR value can be used as a reference index for enterprises to evaluate investment risk and help enterprises to make investment decisions under the premise of controllable risk.

IV. matters needing attention

1. When calculating IIRR, we need to pay attention to the accuracy of the time node and amount of cash flow, so as to avoid the calculation results deviating from the actual situation due to data errors.

2. IIRR is only applicable to projects with similar risk characteristics and investment duration. For projects with different risk levels or investment periods, other appropriate investment evaluation indicators should be selected.

3. In practical application, enterprises also need to combine other financial indicators (such as net present value, investment payback period, etc.) for comprehensive analysis, in order to get a more comprehensive and objective investment decision.

V. case study

In order to help readers better understand the method of calculating the internal rate of return of incremental investment, we illustrate it through a simple case. Assume that the cash flows for projects An and B are shown in the following table:

Project 0 1 2 3 4 Project A-100 30 40 50 60 Project B-80 20 30 40 40 50

Based on the above data, we can calculate the cash flow Δ C (t) and net present value Δ NPV of incremental investment. Through the iterative method, it is concluded that the internal rate of return of incremental investment IIRR is about 23.5%. In practical application, enterprises can select and adjust the project according to their own needs and risk tolerance.