NPV / IRR Calculation
NPV:
NPV = S + { Cash flow for t year / (1+ R)^t } + { cashflow for n year /(1 + R)^n }
Where "S" denotes initial investment, "t" denotes the number of year, "R" denotes rate of return, "n" denotes
the number of years.
IRR:
The formula used for the calculation of internal rate of interest is as follows:
V = -R (1+i)^n - [R(1+i) { (1+i)^n - 1}/ i]
Where "V" stands for expected future value of the investment, "R" stands for present value of the investment, "n" stands for the time period the investment is to be made, and "i" stands for rate of interest for the designated period "n", "^" denotes exponential figure.
An investment proposition is considered good if the Internal Rate of Return of a particular option is better than the Internal Rate of Return of other option where the same investment over a period of time might not give as much return as in the case of short listed one. The Internal Rate of Return is considered good or profitable if it is more than the hurdle cost plus expenses.
Comparison:
- The main difference between the net present value and the internal rate of return is that, net present value is the value of the future cash flows with a discounted rate in terms of the present value of the currency or capital whereas the internal rate of return is the value (in percentage) of the interest yielded on the investment in the future. Internal rate of return can be stated as the negative side or perspective of the net present value.
- The net present value gives the detailed value of the lowest expected rate of return whereas the internal rate of return marks the minimum rate of interest on which the investment will touch break even.
- Internal rate of return does not necessarily need the cost of capital as an essential whereas this factor is one of the main entities in the net present value calculation. Thus internal rate of return method is easier to grasp as compared to the net present value calculation.
- A net present value profile which compares both NPV and IRR on a graphical scale, puts most aspects into the correct perspective offering the investors more critical and detailed information on various points of time on the investment path, over a period of time.
If your not very good at using your HP12C calculator or you don’t have one,
the great thing about the KISCL software is that it calculates the IRR for you. Check out this static
screen shot showing you just how easy it is to not only calculate your IRR, but how easy it is to
change numbers and see many ‘What If’ scenarios.
Sample of the Loan Sizer Tool.
