Interpolation Formula and steps for calculating Internal rate of return

Internal rate of return (Internal Rate of Return, IRR) is an important index to evaluate the profitability of investment projects. This article will introduce in detail how to use interpolation to calculate IRR.CashoptionforpowerballIncluding formulas and concrete steps

IRR is the discount rate that makes the net present value (Net Present Value, NPV) of the project equal to zero. Investment projects are generally considered acceptable when the IRR is higher than the expected minimum return.

The basic formula for calculating IRR by interpolation is as follows:

NPV = ∑ (CFt / (1 + IRR) t)-I0 = 0, where:

-CFt represents the cash flow of period t

-IRR stands for internal rate of return

-I0 represents the initial investment

-t stands for the number of periods.

The specific steps of calculating IRR by interpolation:

oneCashoptionforpowerball. First, determine the cash flow sequence of the project.

twoCashoptionforpowerball. Select an initial discount rate (the approximate value of IRR), for example, you can use the lowest rate of return required by the project or itsCashoptionforpowerballHe is the IRR of a similar project.

3. Calculate the NPV of the project using the selected discount rate.

4. Adjust the discount rate according to the positive and negative values of NPV. If NPV is positive, it means that the discount rate is lower than IRR, and the discount rate should be increased; otherwise, the discount rate should be reduced.

5. Repeat steps 3 and 4 to approach IRR step by step. When NPV approaches 00:00, you are considered to have found IRR.

To help readers better understand the process of calculating IRR by interpolation, here is an example.

Assume that the initial investment is 10000 yuan and the cash flow is shown in the table above. 20% is selected as the initial discount rate, and the calculated NPV is about-394.45 yuan. Since NPV is negative, we need to reduce the discount rate. Then try to use 15% as the discount rate, and the resulting NPV is about 176.75 yuan. Continue to adjust the discount rate, when the discount rate is 18.1%, NPV is close to zero, we can think of IRR as 18.1%.

Through the above steps, we can master the interpolation method to calculate IRR and apply it to the actual investment project evaluation. It should be noted that the interpolation method may have errors in the case of large changes in cash flow, so we can try to use other methods, such as Newton method.