Accounting

We answer your accounting questions.

Over 500 questions have been answered on our accounting blog. Click here to suggest a question.



August 11, 2008

How do I calculate IRR and NPV?

The internal rate of return (IRR) and the net present value (NPV) are both discounted cash flow techniques or models. This means that each of these techniques looks at two things: 1) the current and future cash inflows and outflows (rather than the accrual accounting income amounts), and 2) the time at which the cash inflows and outflows occur. In other words, these models consider the time value of money: a dollar today is more valuable than a dollar in one year, a dollar received in three years is more valuable than a dollar received in five years, and so on.

The internal rate of return or IRR is the rate that will discount all cash inflows and outflows to a net present value of $0. In other words, the IRR model provides you with the true, effective interest rate being earned on a project after taking into consideration the time periods when the various cash amounts are flowing in or out. If you use present value tables to calculate the internal rate of return, it will require some trial and error or iterations to determine the exact rate the project is earning. Software or some financial calculators will provide a quicker and more accurate answer.

The net present value (NPV) discounts all of the cash inflows and outflows by a specified interest rate. The net amount of all of the discounted amounts is the net present value. If the net present value is $0, the project is expected to earn exactly the specified rate. If the net present value is a positive amount, the project will be earning more than the specified interest rate. A negative net present value means the project is expected to earn less than the specified interest rate.

Learn more about the internal rate of return and the net present value at Evaluating Business Investments.

Related Questions



Comments

12 Responses to “How do I calculate IRR and NPV?”

  1. Geoffrey on August 15th, 2008 2:03 pm

    I’m working on an MSc. in Information Systems Management. My first degree is in Network Engineering so accounting is something really new to me. I’ve found articles in accountingcoach.com extremely useful, examples very practical and explanations made in real simple language. Even though I’m still struggling with the subject, accountingcoach.com remains a valuable source of information.
    Best regards,
    Geoffrey

  2. agbonma on August 17th, 2008 6:24 pm

    Accountingcoach.com is awesome.better than my tutors teaching.very simple everyday examples.really much easier to understand.i am personally telling everybody i know that has a hard time understanding accounting to visit this site.i almost cannot believe it myself. keep up the exellent work.

  3. sithembele on October 14th, 2008 1:28 pm

    hello cn anyone show me how do i solve compound calculations, PV FV IRR.

  4. Roxanne on October 28th, 2008 2:44 pm

    The information provided is very useful.

  5. Asad S. Youaf on February 19th, 2009 10:09 am

    At http://www.thinkanddone.com you will find a collection of online financial calculators that will let you find a host of financial metrics such as IRR, MIRR, NPV, Payback and Discounted Pay back period, Stock Valuation, Bond Valuation , YTM on Bonds, Mortgage Payments, Rate of Return, PVIF, PVIFA , FVIF and FIVFA tables.

  6. SABAH on June 17th, 2009 6:07 am

    Iam student on MBA program

  7. SABAH on June 17th, 2009 6:15 am

    I need information Finanal Budgeting and calculation ( IRR, NPV,PAYBACKPERIOD )

  8. ndeshie on June 29th, 2009 10:01 am

    I use to have problems with capital investment projects,but now i understand it very well thanks to accountingcoach

  9. Cirilo on July 29th, 2009 7:25 pm

    Would the franchises’ Internal Rate of Return (IRR) change if the cost of the capital changed?

    Would you e-mail me the answer?
    Thanks
    Cirilo

  10. Valle on September 24th, 2009 7:58 am

    Accountingcoach.com is very essential for my studies, i found so many articles that contributed so much to studies.

    Best regard.

    Valle

  11. one on October 26th, 2009 3:44 pm

    need info and equation to come up with net present value and IRR, any assistance will do

  12. ACoach on October 27th, 2009 5:12 am

    See the managerial accounting topic Evaluating Business Investments on AccountingCoach.com. It explains the net present value and IRR. For more on present value, see the topics Present Value of a Single Amount and also Present Value of an Ordinary Annuity listed under the financial accounting topics. You can read all three at no cost on the site.

Leave a Reply