The difference between internal rate of return and other financial ratios

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IRP, WACC, CAGR and ROI are the main indicators used to evaluate the financial results of investments.

IRP (Internal Rate of Return): Determines the interest rate at which the present cash flows are equal to the initial investment, which gives an idea of ​​how profitable a project is.

WACC (Weighted Average Cost of Capital): A ratio that shows the average cost of capital used in a project and helps establish the minimum level of return required to attract investors and prevent capital losses.

CAGR (Adjusted Annual Growth Rate): A tool that allows you to calculate the average annual return on an investment over a given period.

ROI (return on investment): This indicator helps to compare the profit received from an investment project with the costs associated with its implementation.

Differences between indicators
IRR and WACC . The first indicator peru email list is determined based on all cash flows of the project and indicates the minimum profitability required to return the invested funds. WACC, in turn, serves as an indicator of the risk associated with the choice of investment opportunities. If the IRR value is lower than WACC, it is worth abandoning the project, if higher, the project has the potential for successful implementation.

IRR and CAGR : IRR shows the internal return on investment, while CAGR reflects the average annual return on investment over a certain period of time. When calculating CAGR, only the final result is taken into account without taking into account regular cash flows. This approach is simpler and more convenient for calculations.

IRR and ROI : IRR shows the percentage return on investment, while ROI is calculated as the ratio of the profit received to the invested funds, which indicates the profitability of the investment. This ratio helps in assessing the change in the value of assets at the end of the reporting year compared to their initial level.

For a more accurate assessment of an investment project, it is recommended to use several calculation methods.

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Alexander Kuleshov
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Formula for calculating the internal rate of return
The formula looks like this:

IRR = r, at which NPV = 0

Where:

NPV — net present value of the project's cash flows;

r is the discount rate equal to IRR.

This formula demonstrates that to calculate the internal rate of return (IRR), you need to find a discount rate at which the net present value (NPV) of the project is zero. This can be done either manually, by experimenting with different discount rates, or by using specialized financial functions in spreadsheets, such as the IRR function in Excel.