Investment Language 101 Series: TERM OF THE DAY: -- What Is: ' Internal Rate of Return - IRR ' | E.84 | Trading Candle Cheat Sheet Incl. Each Episode.

in #investing7 years ago (edited)


A series designed to help all the new people flooding into & entering Crypto/Investments daily who get thrown into the rabbit hole so to speak and everything is new to them.


Bitshares 101 Focus/Resources Section for New Crypto Folks now included near the end of each post - starting just prior to Christmas 2017. BTS is a Decentralized Exchange and much more. Very undervalued!


It is a TLDR / Short Form Series, covering ONLY one thing each episode in blue collar, easy to understand language to give a SHORT OVERVIEW of the term or lesson of the day.

It is specifically designed this way to keep it short and simple.

People can then search out extra info if they wish.

I've never seen a regular series or resource running on Steemit to continually address this basic need so I decided to do it.


TERM OF THE DAY:


What is....

' Internal Rate of Return - IRR ' ?

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Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

The following is the formula for calculating NPV:

Where:

Ct = net cash inflow during the period t

Co= total initial investment costs

r = discount rate, and

t = number of time periods

To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate r, which is here the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically, and must instead be calculated either through trial-and-error or using software programmed to calculate IRR.

Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects a firm is considering on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

IRR is sometimes referred to as "economic rate of return" (ERR) or "discounted cash flow rate of return (DCFROR)." The use of "Internal" refers to the omission of external factors, such as the cost of capital or inflation, from the calculation.

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Breaking Down...

' Internal Rate of Return - IRR ' :

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You can think of internal rate of return as the rate of growth a project is expected to generate.

While the actual rate of return that a given project ends up generating will often differ from its estimated IRR rate, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth. One popular use of IRR is in comparing the profitability of establishing new operations with that of expanding old ones. For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one. While both projects are likely to add value to the company, it is likely that one will be the more logical decision as prescribed by IRR.

Internal Rate of Return (IRR) in Practice

In theory, any project with an IRR greater than its cost of capital is a profitable one, and thus it is in a company’s interest to undertake such projects. In planning investment projects, firms will often establish a required rate of return (RRR) to determine the minimum acceptable return percentage that the investment in question must earn in order to be worthwhile. Any project with an IRR that exceeds the RRR will likely be deemed a profitable one, although companies will not necessarily pursue a project on this basis alone. Rather, they will likely pursue projects with the highest difference between IRR and RRR, as chances are these will be the most profitable.

IRRs can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRRs greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.

Although IRR is an appealing metric to many, it should always be used in conjunction with NPV for a clearer picture of the value represented by a potential project a firm may undertake.

Internal Rate of Return (IRR) Issues

While IRR is a very popular metric in estimating a project’s profitability, it can be misleading if used alone. Depending on the initial investment costs, a project may have a low IRR but a high NPV, meaning that while the pace at which the company sees returns on that project may be slow, the project may also be adding a great deal of overall value to the company.

A similar issue arises when using IRR to compare projects of different lengths. For example, a project of a short duration may have a high IRR, making it appear to be an excellent investment, but may also have a low NPV. Conversely, a longer project may have a low IRR, earning returns slowly and steadily, but may add a large amount of value to the company over time.

Another issue with IRR is not one strictly inherent to the metric itself, but rather to a common misuse of IRR. People may assume that, when positive cash flows are generated during the course of a project (not at the end), the money will be reinvested at the project’s rate of return. This can rarely be the case. Rather, when positive cash flows are reinvested, it will be at a rate that more resembles the cost of capital. Miscalculating using IRR in this way may lead to the belief that a project is more profitable than it actually is.

This, along with the fact that long projects with fluctuating cash flows may have multiple distinct IRR values, has prompted the use of another metric called modified internal rate of return (MIRR). MIRR adjusts the IRR to correct these issues, incorporating cost of capital as the rate at which cash flows are reinvested, and existing as a single value. Because of MIRR’s correction of the former issue of IRR, a project’s MIRR will often be significantly lower than the same project’s IRR.



Your Friend in Liberty, Barry.



Trading Candle Cheat Sheet:

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Further Reading/Source/Resources

Friend of the People -- Enemy of the State.

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Bitshares 101 Focus/Resources Section:

for New Crypto Folks.

https://bitshares.org/

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-- Bitshares is a Trading platform, and a LOT more.... designed by blockchain wizard here Dan Larimer - @dan / @dantheman.

I've blogged on him, and BTS many many times.

It's a place you can use that is decentralized, with an active community, to use trading lessons like this, that we are learning together.

Just a few of my past $BTS blogs....

to help you apply lessons today!

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https://steemit.com/bitshares/@barrydutton/crypto-101-series-stan-larimer-the-godfather-of-bitshares-and-father-of-blockchain-liberty-genius-dan-larimer-interview-recently

https://steemit.com/bitshares/@barrydutton/will-blockchain-guru-dan-larimer-be-called-in-to-save-ethereum-as-crypto-kitties-grinds-eth-chain-to-a-halt-the-irony

https://steemit.com/cryptocurrency/@barrydutton/dan-larimer-video-interview-on-epicenter-recently-this-is-a-must-watch-listen-an-in-depth-look-chat-about-his-past-crypto-life

https://steemit.com/steemit/@barrydutton/dan-larimer-community-musical-tribute-post-a-music-video-to-say-thanks-and-best-wishes-to-our-steemit-co-founder

https://steemkr.com/bitshares/@barrydutton/so-tether-project-was-hacked-another-use-case-for-bitshares-and-dan-larimer-blockchain-genius-which-remains-undervalued-and


Thanks for reading, have a nice day.


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https://steemit.com/investing/@barrydutton/investment-language-101-series-term-of-the-day-what-is-current-ratio-or-e-83-or-trading-candle-cheat-sheet-incl-each-episode

https://steemit.com/curation/@barrydutton/2018-edition-the-steemu-asks-what-are-you-blogging-about-today-or-e-49-or-drop-your-links-and-ideas-here-like-mad-pictures

https://steemit.com/steem/@barrydutton/steem-is-more-value-priced-right-now-when-you-trade-your-usdsbd-for-it-if-you-look-at-the-charts-you-may-want-to-grab-some

https://steemit.com/investing/@barrydutton/investment-language-101-series-term-of-the-day-what-is-time-value-of-money-tvm-or-e-82-or-trading-candle-cheat-sheet-incl-each

https://steemit.com/bitshares/@barrydutton/bitshares-focus-post-or-investment-language-101-series-term-of-the-day-what-is-return-on-investment-roi-or-e-77-or-trading

https://steemit.com/investing/@barrydutton/investment-language-101-series-term-of-the-day-what-is-futures-contract-or-e-76-or-trading-candle-cheat-sheet-incl-each-episode

https://steemit.com/crypto-news/@barrydutton/breaking-video-dash-core-team-names-new-dash-core-director-of-business-development-bradley-zastrow-24-mins

https://steemit.com/curation/@barrydutton/bloodbath-edition-cryptocurrency-on-hodl-what-are-you-hodl-g-or-sodl-g-today-13-or-origin-of-hodl-always-included-for-newer

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Please note -- I will have limited internet access for awhile -- so PLEASE do not be upset that I cannot reply right away, or to everyone. I am dealing with some changes, and will have limited time online and will be happy if I get a few blog posts up a week.
This has really upset some people but I do not force my opinions on others, or need to communicate every detail of my life or issues, most people do not care anyways. I invested around 10 hours or more a day on Steemit most of my first 13 mths here, trying to build community, put out content and engage people, help and donate to people, and I just do not have that time in my life right now, and that includes for replies and voting/curation.
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Carry On.

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Nice information, really useful for beginners like me, thank you very much.

Nice post I am waiting for your post

Another solid post with a ton of information. Recommended, especially the candle cheat sheet.
Thanks @barrydutton

..... wait til you see what I am putting up in about 10 mins LOL

Thanks again for stopping by @hashcash

Yup, the next one is even better.
I love this shit.

being a new user I was little bit confused about ' Internal Rate of Return - IRR ' , you make me clear

Great to hear!