skyepokerplayer| How to calculate the internal rate of return of the amount 6-Calculation method of the internal rate of return of the difference

The calculation method of differential Internal rate of return

In the investment decision, it is very important to evaluate the profitability of the project. Internal rate of return (Internal Rate of Return, referred to as IRR), as an index for evaluating investment projects, enables investorsSkyepokerplayerUnderstand the potential returns of the project. This paper will introduce the calculation method of the internal rate of return of the difference in detail, and provide an actual case for analysis.

What is the differential internal rate of return?

The differential internal rate of return (Net Present Value) refers to the internal rate of return of net present value (NPV) between two or more investment schemes. By calculating the internal rate of return on the difference, investors can compare the investment benefits of different schemes and make more informed decisions.

Steps to calculate the internal rate of return of the difference

oneSkyepokerplayer. Calculate the net present value (NPV) of each investment scheme

First of all, the net present value of each investment scheme needs to be calculated. The net present value refers to the difference between the present value of the net cash inflow of the project in the future and the investment cost of the project. The calculation formula is as follows:

NPV = ∑ (CFt / (1 + r) t)-I

Where CFt represents the cash inflow in the t year, r is the discount rate, t is the time (year), and I is the initial investment cost.

two。 Calculate the present value of the difference between investment schemes (DNPV)

The present value of the difference refers to the difference between the net present value of two investment schemes. The calculation formula is as follows:

DNPV = NPV scenario 1-NPV scenario 2

3. Determine the differential internal rate of return (DIRR)

The internal rate of return of the difference refers to the discount rate that makes the present value of the difference zero. In other words, DIRR is the turning point in the relationship between the present value of the difference and time. It can be solved by iterative method, Newton method or other numerical solution.

skyepokerplayer| How to calculate the internal rate of return of the amount 6-Calculation method of the internal rate of return of the difference

Actual case analysis

Suppose investors are faced with two investment projects An and B, which require an investment cost of 1 million yuan respectively. Project An expects cash inflows of 300000 yuan, 400000 yuan, 500000 yuan, 600,000 yuan and 700000 yuan in the next five years, respectively. Project B expects cash inflows of 350000 yuan, 450000 yuan, 550000 yuan, 650,000 yuan and 750000 yuan in the next five years, respectively.

First, we calculate the net present value of the two projects. Assume that the expected return of investors is 10%. According to the NPV formula, the NPV of project An is 473100 yuan and the NPV of project B is 678300 yuan.

Next, we calculate the present value of the difference. DNPV = NPVA-NPVB = 47.31-67.83 =-205200 yuan.

Finally, we solve the differential internal rate of return. Through iterative method or other numerical methods, we can get that the DIRR is about 15.62%. This means that when investors expect a return of 15.62%, the present value of the difference between the two projects will be zero. As the DIRR is higher than the expected return of investors, investors should choose project B.

Summary

In this paper, the concept and calculation method of differential internal rate of return are introduced in detail, and analyzed by practical cases. Investors can compare the investment benefits of different schemes by calculating the differential internal rate of return, so as to make more informed investment decisions. It should be noted that a variety of uncertain factors may be involved in the actual operation, so various factors should be taken into account when evaluating investment projects.