Calculation methods and steps of Internal rate of return of incremental Investment

I. introduction

Incremental investment refers to the increase of capital investment on the basis of the original investment in order to expect a higher return. Internal rate of return (Internal Rate of Return, referred to as IRR) is an important index to evaluate the income level of investment projects. This paper will introduce in detail the calculation methods and steps of the internal rate of return of incremental investment.

The concept of internal rate of return (IRR)

Internal rate of return (IRR) refers to the discount rate that makes the net present value (Net Present Value, referred to as NPV) of the investment project zero. In other words, IRR is the annualized rate of return expected by investors in the project investment. Investment projects are generally considered attractive when the IRR is higher than the minimum return required by investors.

III. Calculation method of incremental investment

The calculation of the internal rate of return of incremental investment can be divided into the following stepsCandycrushmodapp:

oneCandycrushmodapp. Determine the cash flow of the increased investment

First of all, it is necessary to calculate the change in cash flow caused by the increased investment. This includes additional investment, future cash inflows and increases in cash outflows as a result of increased investments.

twoCandycrushmodapp. Calculated net present value (NPV)

The cash flow after the increased investment is used to calculate the net present value under different discount rates. Net present value is the discounted value of the difference between future cash inflows and cash outflows. The calculation formula is as follows:

NPV = ∑ (CF_t / (1 + r) ^ t)-I

Where NPV is the net present value, CF_t represents the cash flow of the t period, r is the discount rate, t is the time, and I is the initial investment.

3. Solve the internal rate of return (IRR)

Through iterative or numerical methods, we can find the discount rate that makes NPV zero, that is, the internal rate of return of incremental investment. In the actual calculation, we can use tools such as IRR function or financial calculator in Excel to solve the problem.

IV. an example for calculating the internal rate of return of incremental investment

Suppose a company is considering increasing investment in a project. The cash flow of the original project is as follows (unit: ten thousand yuan):

Year cash flow (ten thousand yuan) 0-1000 1 200 2 300 3 400

The company plans to increase its investment by 2 million yuan in the second year, and it is expected that future cash inflows will increase by 500000 yuan, 600000 yuan and 700000 yuan respectively. The cash flow after the increased investment is as follows (unit: ten thousand yuan):

Year cash flow (ten thousand yuan) 0-1200 1 250 2 360 3 470

Use Excel or itsCandycrushmodappWith his financial calculation tool, we can calculate that the internal rate of return after the increased investment is 14.35%. If the rate of return is higher than the company's minimum return requirements, then the increased investment is worth considering.

5. Conclusion

Understanding the calculation methods and steps of the internal rate of return of incremental investment will help investors to better evaluate the income level of the project and make wise investment decisions. At the same time, mastering this method is also helpful for enterprises to better plan and manage investment projects.