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[00:00:50] Definition of IRR
[00:01:27] Example #1
[00:01:50] Calculating IRR with a Financial Calculator
[00:03:14] Calculating IRR with a Spreadsheet
[00:03:40] Example #2
[00:05:10] How IRR and NPV Are Related
This video will explain when we are solving for "i" in our financial calculator, we are solving for internal rate return. IRR is also sometimes known as Effective Annual Rate or Effective Annual Yield depending on which side of the investment you're on.
Definition of IRR
Internal Rate of Return is the discount rate at which the net present value equals zero. It's effectively the regression line for all of the cash flows, including the initial cash flow and the final cash flows and accounts for the time value of money.
When you're solving for I, you're typically solving for the rate of return, which is your IRR.
Calculating IRR with a Spreadsheet
In Excel, we would just hit equals IRR and then highlight the array.
You'll notice that in Excel it asks you to guess. And I have mixed feelings about that. That's a different discussion, but that just reinforces my point of knowing how to calculate this on your calculator and do it right every time.
How IRR and NPV Are Related
What the NPV tells us is that if our target threshold for a return on investment is 8%, then any positive net present value exceeds 8%.
Internal Rate of Return is the discount rate, or the yield, at which the net present value equals zero.
Net Present Value tells you whether or not you have achieved the threshold that you set, But most of the time a finance manager or an investor is going to say, "Hey, I'm not going to do this investment unless I make at least 8%.
If you want to know the exact IRR of the cash flow, you'd be solving for (i) and that's your Internal Rate of Return.
I hope you enjoyed this lesson. Please don't forget to like and subscribe and all that. Thanks for watching.
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