I am confused about IRR calculation in education, my humble request is that, if there will be another video like this about IRR calculation in education, I would be benefited.
Mr.X bought bonds of the face value of Rs.1000/- each at a discount of 10% on face value, bearing coupon@ 10% p.a., residual tenure for redemption at par being exactly 2 years from the date of acquisition. What is the IRR?
I think ''I double R' is a better way of saying it, because when people keep saying ''Aye-AR-ARRR' they sound like they're trying to be a pirate lol :-)
I have a practical problem which I'm a bit confused about it and I need help to solve it. I have made an investment during the past 3 years: In the first year cash out-flow of (30k), in the second year (30k), and in the third year (40k) and Iearned 10% ownership share of the business. How to calculate the NPV and IRR since all my cash were out-flow and? do I use my Pre-money valuation to find the NPV and Post money Valuation to Find the IRR?
Reg NPV vs IRR, I am pleased to attach links to three of my recent papers on CBA and investment project appraisal:1. “A New Method to Estimate NPV from the Capital Amortization Schedule and an Insight into Why NPV is Not the Appropriate Criterion for Capital Investment Decision”. paper link: ssrn.com/abstract=2899648. This paper introduces a new method to estimate the NPV based on Capital Amortization Schedule (CAS) and not the conventional DCF method. The new method is more transparent. This paper questions the validity of the NPV as a preferred criterion than IRR. The results also clarify that there is no reinvestment of intermediate income, as CAS does not involve reinvestment. When there is no reinvestment, the MIRR estimate is also redundant. 2. IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investment Projects. ssrn.com/abstract=2913905 3. The Controversial Reinvestment Assumption in IRR and NPV Estimates: New Evidence Against Reinvestment Assumption (February 16, 2017). ssrn.com/abstract=2918744These papers present evidence to identify the most appropriate investment criterion (IRR vs NPV) with emphasis on the controversial multiple, negative and no IRR, mutually exclusive investment and independent projects. The analysis is based on the estimated return on capital (ROC), return on invested capital (ROIC) and capital amortization schedule (CAS). Numerical evidence is furnished to recommend IRR as the best criterion and not the NPV.The analytical results presented in these papers question some of the conventional wisdoms advocated by most finance and economic texts or project analysis guide or publications or teaching materials and therefore the contents will enable the respective authors or organization to revise or update their publications accordingly. The current practice is to prefer NPV but the evidence does not support such preference. Obviously, without perfecting the methods any amount of skill-full analysis and articulation may not add value and credibility. Please feel free to send me your comments.RegardsDr. Kannan Arjunan
I just hate the definition of IRR. "Rate where NPV = 0"! This is how every damn book defines it. Can there be any better explanation for someone who has no clue WHY NPV = 0?
You are basically determining the rate of return at whick the project will break-even. This is why you are setting NPV = 0. At an NPV of 0, no weath is being added or destroyed at the firm. Hope this helps!
So then if the IRR for a given investment is 10% it means that i need to make minimum 10% to breakeven. Now if IRR increases to 15%, it means that now i will need to make at least make 15% (i.e. more than before) to break-even. Does that mean increasing IRR is bad? Sorry, i feel i am missing something conceptually. Thanks for the help.
Your first sentence is a correct statement. I think the disconnect is that IRR is only calculated once. IRR is used to determine if a company should accept or reject a project. Let's say you decided to accept a project. One year later, there's no use in recalculating IRR because you've already started the project. IRR uses the time value of money to determine if doing a certain project will be more profitable for the company compared to simply investing the money. Thus, you are determining the rate required to break-even (given the current market conditions). Any project's rate of return that is higher than the IRR "break-even" rate of return should be accepted because it will out perform any investing that you could have alternatively done with your money.
Could you please explain why you take cash flow always to start a project as a negative value. Actually, cash flow for start project could be as negative as positive, isn't it? Thank you in advance.
John - Usually investment projects require an upfront investment - hence the negative sign. BUT, you are right. Year 0 cash flow can be positive, for instance, in situations, where you are BORROWING money. In that case, typically the subsequent cash flows are negative (as you make payments on that loan). Turns out that in situations like these too, the general IRR rule does not apply. Specifically, while you should accept any INVESTMENT in which IRR > k, you should only borrow money if the IRR < k.
The IRR is compared to the rate of return to see if it would be a profitable investment. When the problem has 2 solutions, you can't average the solutions. Additionally, you can't just pick the more favorable IRR because you are uncertain which one is the correct value. In an instance like this, it is best to calculate the NPV since the IRR value can't be trusted. Thanks for the question, and hope this helps!
I have a practical problem which I'm a bit confused about it and I need help to solve it. I have made an investment during the past 3 years: In the first year cash out-flow of (30k), in the second year (30k), and in the third year (40k) and Iearned 10% ownership share of the business. How to calculate the NPV and IRR since all my cash were out-flow and? do I use my Pre-money valuation to find the NPV and Post money Valuation to Find the IRR?
![IRR vs. NPV - Which To Use in Real Estate [& Why]](http://i.ytimg.com/vi/hGw2J__2adU/mqdefault.jpg)
The best teacher I've ever had the privilege to study from! Hands down!!!
well respect ! sir. I have been watching your video for years.
Thank you for your support my friend! I'm honored to have been part of your educational journey 😀
SUPER CLEAR AND PRECISE!!!!!!!!! God bless you sir
chingaum FX My pleasure, thank you for the kind words!
i agree
this 100% better than my accounting professor's explanation...
You should be able to get a degree from Edspira. I would rather pay him tens of thousands and save the time.
😀
so excellent teaching, can't say how I appreciate it.
Thank you so much!
I am confused about IRR calculation in education, my humble request is that, if there will be another video like this about IRR calculation in education, I would be benefited.
Excellent explanation and great teaching skills. Thank you so much!
Yes indeed, THANKS for being so clear and concise!!!
Thank you for your all beautifully explained videos.
why 25% and 400% in first problem :’ im dying
I believe by using excel
I got 25% using my calculator. I believe excel spits out multiple irr due to the negative cash flow
Mr.X bought bonds of the face value of Rs.1000/- each at a discount of 10% on face
value, bearing coupon@ 10% p.a., residual tenure for redemption at par being exactly 2
years from the date of acquisition. What is the IRR?
I think ''I double R' is a better way of saying it, because when people keep saying ''Aye-AR-ARRR' they sound like they're trying to be a pirate lol :-)
VERY USEFUL and CLEAR!!
Thanks!!
God bless you sir..thank you very much for your great work.it help me lot.thanks again
I have a practical problem which I'm a bit confused about it and I need help to solve it.
I have made an investment during the past 3 years: In the first year cash out-flow of (30k), in the second year (30k), and in the third year (40k) and Iearned 10% ownership share of the business. How to calculate the NPV and IRR since all my cash were out-flow and? do I use my Pre-money valuation to find the NPV and Post money Valuation to Find the IRR?
great content! I just still don't understand IRR :(
Very Useful...Thank you very much Sir!
Great video
How did you calculate 25% and 400% for the first example, and for the second example, IRR is negative i assume? It's very misleading
Watching the IRR video explains, it assumes you watched the irr and npv video.
See my response to Micah Larroque in the comments below
@@Snelly0815I don’t see it
Reg NPV vs IRR, I am pleased to attach links to three of my recent papers on CBA and investment project appraisal:1. “A New Method to Estimate NPV from the Capital Amortization Schedule and an Insight into Why NPV is Not the Appropriate Criterion for Capital Investment Decision”. paper link: ssrn.com/abstract=2899648.
This paper introduces a new method to estimate the NPV based on Capital Amortization Schedule (CAS) and not the conventional DCF method. The new method is more transparent. This paper questions the validity of the NPV as a preferred criterion than IRR. The results also clarify that there is no reinvestment of intermediate income, as CAS does not involve reinvestment. When there is no reinvestment, the MIRR estimate is also redundant. 2. IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investment Projects. ssrn.com/abstract=2913905 3. The Controversial Reinvestment Assumption in IRR and NPV Estimates: New Evidence Against Reinvestment Assumption (February 16, 2017). ssrn.com/abstract=2918744These papers present evidence to identify the most appropriate investment criterion (IRR vs NPV) with emphasis on the controversial multiple, negative and no IRR, mutually exclusive investment and independent projects. The analysis is based on the estimated return on capital (ROC), return on invested capital (ROIC) and capital amortization schedule (CAS). Numerical evidence is furnished to recommend IRR as the best criterion and not the NPV.The analytical results presented in these papers question some of the conventional wisdoms advocated by most finance and economic texts or project analysis guide or publications or teaching materials and therefore the contents will enable the respective authors or organization to revise or update their publications accordingly. The current practice is to prefer NPV but the evidence does not support such preference. Obviously, without perfecting the methods any amount of skill-full analysis and articulation may not add value and credibility. Please feel free to send me your comments.RegardsDr. Kannan Arjunan
I understand!
Very Helpful.. Thanks Alot..
No problem!
What is the tool that you are using?
I worked out the IRR and go 110% and 55%? do you know why ?
top one
100=220/(1.1+R) and solved algebracially
points are clear, but example could be better
I just hate the definition of IRR. "Rate where NPV = 0"! This is how every damn book defines it. Can there be any better explanation for someone who has no clue WHY NPV = 0?
You are basically determining the rate of return at whick the project will break-even. This is why you are setting NPV = 0. At an NPV of 0, no weath is being added or destroyed at the firm. Hope this helps!
BTW, here's a more in depth video on IRR if you are interested: th-cam.com/video/OSDDrZZaV8E/w-d-xo.html
So then if the IRR for a given investment is 10% it means that i need to make minimum 10% to breakeven. Now if IRR increases to 15%, it means that now i will need to make at least make 15% (i.e. more than before) to break-even. Does that mean increasing IRR is bad? Sorry, i feel i am missing something conceptually. Thanks for the help.
Your first sentence is a correct statement. I think the disconnect is that IRR is only calculated once. IRR is used to determine if a company should accept or reject a project. Let's say you decided to accept a project. One year later, there's no use in recalculating IRR because you've already started the project. IRR uses the time value of money to determine if doing a certain project will be more profitable for the company compared to simply investing the money. Thus, you are determining the rate required to break-even (given the current market conditions). Any project's rate of return that is higher than the IRR "break-even" rate of return should be accepted because it will out perform any investing that you could have alternatively done with your money.
Got it! I understand now. Thank you Edspira! I can finally relax now ;)
good one.thanks
Could you please explain why you take cash flow always to start a project as a negative value. Actually, cash flow for start project could be as negative as positive, isn't it? Thank you in advance.
John - Usually investment projects require an upfront investment - hence the negative sign. BUT, you are right. Year 0 cash flow can be positive, for instance, in situations, where you are BORROWING money. In that case, typically the subsequent cash flows are negative (as you make payments on that loan). Turns out that in situations like these too, the general IRR rule does not apply. Specifically, while you should accept any INVESTMENT in which IRR > k, you should only borrow money if the IRR < k.
@@professorikram Thank you for a clear answer.
good
why we should not take 400% irr between 25% and 400%??
The IRR is compared to the rate of return to see if it would be a profitable investment. When the problem has 2 solutions, you can't average the solutions. Additionally, you can't just pick the more favorable IRR because you are uncertain which one is the correct value. In an instance like this, it is best to calculate the NPV since the IRR value can't be trusted. Thanks for the question, and hope this helps!
@@EdspiraI got 25% using my calculator. Did you get 2 solutions by using Excel? I believe calculators only show one
Ok
Marcos Flats
👍
I have a practical problem which I'm a bit confused about it and I need help to solve it.
I have made an investment during the past 3 years: In the first year cash out-flow of (30k), in the second year (30k), and in the third year (40k) and Iearned 10% ownership share of the business. How to calculate the NPV and IRR since all my cash were out-flow and? do I use my Pre-money valuation to find the NPV and Post money Valuation to Find the IRR?