Calculating an investment’s internal rate of return enables you to identify the interest rate at which the investment future cash flows have a net present value of zero. In other words, your formula tells you the discount rate at which you would break even on a given investment. If the IRR formula returns a value greater than the interest rate of risk-free investments, you should take the plunge.
- [Voiceover] Calculating an investments internal rate of…return, enables you to identify the interest rate,…or discount rate, at which an investment's future…cash flows have a net present value of zero.…In other word's, your formula tells you the discount rate…at which you would break even, on a given investment.…If the IRR formula returns a value greater than…the interest rate generated by risk-free investments,…such as Treasury bills or municipal bonds…that are very highly rated,…then you should probably do the project.…If not, then you should pass on the opportunity…and accept the returns from your risk-free investment.…
In this movie, I will show you how to calculate…the internal rate of return…of a series of regular cash flows,…and I will use the IRR_03_06 sample workbook.…You can find that in the chapter three folder…of the exercise files collection.…This workbook contains two different sets of cash flows.…The first is for investment one.…And we see an initial outlay of $100,000.…That's a negative number because it's an outflow.…
- Define NPER.
- Determine the appropriate method of depreciation to use on tax returns.
- Recall which function is used to evaluate a fixed-rate investment or an annuity that makes periodic payments to the beneficiary.
- Identify the term for the rate of return earned from a zero-risk investment.
- Explain the purpose of the XNPV function.
- Recognize the type of bond that pays interest before it matures.
- Name three arguments needed to use the TBILLYIELD function.
Skill Level Intermediate
1. Analyzing Loans, Payments, and Interest
2. Calculating Depreciation
3. Determining Values and Rates of Return
4. Calculating Bond Coupon Dates and Security Durations
5. Calculating Security Prices and Yields
6. Calculating Prices and Yields of Securities with Odd Periods
Additional resources1m 24s
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