IRR (Internal Rate of Return)

This video explains the concept of IRR (the internal rate of return) and illustrates how to calculate the IRR via an example.
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[@nathanberry7737]

I have sat through Harvard MBA lectures that weren't this concise, thorough, and articulate. Thank you for an excellent presentation.

[@alexblack8780]

bullshit lol

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@@alexblack8780 People who just say such videos are bullshit are people who don't study and expect to find videos that are exactly like their assignment requirements. You did not study

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weird flex but ok

[@christiantemurcu5587]

in 10 minutes this man happens to explain things better than my professor does in an hour and a half

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The way university professors get discredited on KZbin

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[@habibrahmeh]

Man !!! how can i thank you for this ? so many courses and videos, and u make it clear, simple and logic....

[@Edspira]

Glad you like them!

[@RaferJeffersonIII]

I am a 38 year old who failed maths at school and now I’m training for investment exams. Your videos are helping me greatly. Mathematics really isn’t as intimidating as it seems.

[@ජයනියතයි]

Happy 40th Bday!

[@RaferJeffersonIII]

@@ජයනියතයි thank you. I passed the exams and it got me a really good job.

[@nikhilesh9445]

@@RaferJeffersonIII thats awesome man, could you throw some light on what type of exams you gave? It will really help me

[@RaferJeffersonIII]

@@nikhilesh9445 CFA IMC.

[@RaferJeffersonIII]

@@nikhilesh9445 oh and CII AF4 but I already had a bunch of CII exams

[@ankitag852006]

After so many videos and lectures in last 10 years, finally found something relevant. Thanks for the amazing yet simple explanation.

[@jjholmes8530]

I have cracked it by watching this video over and over. Thank you for such awesome content. Thank God ❤️. IRR is the actual rate of return of an investment. IRR can be found when Npv =0. This is because The cash flows which we are going to earn in future, are future cash flows which have to be converted into their present value. This is done for an 🍎 to 🍎 comparison. If Npv>0 it means capital appreciation and Npv

[@venhelo9890]

This video is a must before reading any text-book this topic.

[@omarramahi383]

I wish you were my professor. your explanations are amazing!

[@francoisgendron3464]

The algebra to obtain R=.30 : Does that mean that : 1) 130/(1+R) to the power of 1 since there is just one period; 2) 100 replace R; 3) so 130/100 - 1 ... 1.30-1=.30.

[@ryckoandhika1781]

Thank you so much. My brain was collapsed to figure out this algebra. Regret to not paid attention at school. Hahah

[@thewindrises]

I like how you explain formulas conceptually like a professor (like how you explained the tax shield in the WACC video). A lot of websites only tell you what the formula is, but don't tell you why.

[@tatata7710]

Waaaw, I have looking for explanations about IRR, NPV and it was always confusing. You just enlighten me. This video is 9 years old but a lot more clear than all the one I have checked. Thanks a lot. I hope that you continue to do that.

[@tailerouge]

I’m taking a financial statement analysis course, and before watching this video I didn’t understand the point of the IRR. I couldn’t see why you would want to set the NPV = 0. Now that I see that the two functions are different ways of coming up with a decision (one a dollar figure and the other a rate), it makes perfect sense.

[@fuadkazimov3539]

This tutor is amazing. I really find his videos helpful and easy to understand. THANK YOU!

[@Edspira]

Fuad, Thanks so much for watching the videos!

[@inshaamjad8313]

I appreciate his efforts. This man explains everything in such an easy way and in 10min. Woww

[@ubaidkhan183]

I am currently studying masters in Australia and I must say you are far better then my tutor. Thank you for uploading ❤

[@vivilin4571]

Thank you sir! You helped me save so much time with my MBA studies!

[@Edspira]

+Vivi Lin No problem! I hope you're having a great experience with the MBA!

[@carolinavargashinojosa6084]

This was much easier to understand than my professor's explanation. Thank you for your videos, they are lifesavers!!!

[@Edspira]

You're very welcome!

[@lisama2538]

I love how u mention what does that mean conceptually. Im here for that. thank you so much

[@Edspira]

I'm so glad you found that helpful!

[@veganwilliamdotyfreshour3665]

What a lovely insightful view of IRR.

[@VirusDeath100]

Really good explanation and just 7 mins. Loads better than other videos . Thnx a lot :D

[@dennisriray3510]

Thanks for making my Financial Mgmt class so much easier!

[@ThisIsntKev]

It's finals week and Edspira is my lord and savior until it's over

[@judolata4871]

I don't like online learning, but I like online learning with you.

[@Edspira]

Thank you my friend!

[@marklee1194]

Thank you so much for your help. I first struggled with this concept in class. You made learning economics fun and easy!

[@Edspira]

Thanks Mark Lee! It always good to hear that these videos are helpful :)

[@ZainIshe]

This guy is a genius, thumps up

[@datcajungrl]

Thank you so much for posting these videos! You are an incredible instructor. Now I understand my classwork. Great job!

[@dion8070]

what about when we have a time of about 5 years how do we solve for R knowing that you add them together increasing the power of 1+i

[@elisabethtricot3010]

I was getting really frustrated and then I found this video and now I feel intelligent, thank you!!

[@5naini]

Your way of explaining is soo simple, yet elaborate. Love it

[@mphoqwabe8602]

Studying through Unisa and man one is alone. I will be going through all your lessons preparing assignment and exams thank you😊

[@Chamchard_George]

If project I of like 5 years you use the cumulative cash flow or the cash flow of the fifth year?

[@abdofouda2871]

what about having project has more than one return how can I calculate internal rate of return to this project?

[@johncliffordaddae9007]

You'll have to discounts all the returns, find their sum and put it in the NPV formula.

[@Marknorthway]

Ferris Bueller's teacher came to mind! Good stuff, though, seriously. Thanks!

[@portiagriffey4403]

Hi, it would be useful to explain the 30%... yes 30% is needed to get NVP=0. But that was either trial and error to get it or a calculation that you didn't explain??

[@poonageguy]

Your videos are a lifesaver, especially for a beginner - Keep up the good work!

[@comfortpropertiesassociate9494]

I'm just getting started in investing in multifamily. This video is GREAT!!!

[@심우우-s1i]

Thank you sir so much! It's my first time to leave a comment, but your lecture is so superb! I hope you're my professor. Best lecture ever! Clear! And perfect thank you so much! You saved me♥♥

[@shinchansfunnyvines6900]

You are exceptionally good. Thanks Sir.

[@desmondagbey4696]

You are are really good. You made me understand this concept better than my lecturer. U earned my subscription. I will keep learning from you. Thanks Sir❤

[@ninsidhu]

Works just as he says once I bought the basic casio calculator!!! Thank you

[@burr1tozilla34]

YOU EXPLAIN BETTER THAN MY CORPORATE FINANCE PROFESSOR. MY LORD AND SAVIOR

[@Apounarous77]

Awesome and clear thanks !

[@Edspira]

My pleasure! Best wishes

[@rebeccastrait4309]

Education Unlocked

[@ANDRaspberryJAM]

Excellent stuff - the algebra makes it so clear

[@yasserkhan70]

I'm confused... You get an NPV of $20.37 when r=8%. And an NPV of $0 when R=30%. Why does this mean you accept when R>r? If R

[@Earth098]

Very Clear. Helpful for the exam. Thanks

[@Edspira]

No problem-- hope you did well on the exam!

[@manikantak8798]

superb,... conceptual... 8 percent is bep in this ex ... irr more than bep accept.. thats the conceptual point u made amazingly explained in a conceptual manner...!!great boss !!

[@Edspira]

Thanks for the kind words!

[@PomegranatePizza]

In a 25-year turnkey investment (one payment up front; no inflation), my IRR is 12.8% I would like to figure out how much it should take for me to sell the investment in a particular year during those 25 years. Is that calculable? If, by trial and error in Excel, I figure out the buyer’s price that would make his IRR equal 12.8%, have I just found a fair selling price?

[@kimberlystevens3020]

Nice and clear, much appreciated.

[@rosieburns2843]

Really helpful but still don't get how you calculated that the big R = 30% - please can someone help?

[@tammyea8325]

same

[@josephine8102]

how do you get the 0.30%?

[@Zulqarnain-m6t]

0=-100+130/1+R Shift -100 to left side it becomes +100 100= 130/1+R Multiply 1+R both sides 100(1+R)=130 Divide 100 both sides 1+R=130/100 1+R=1.3 Subtract 1bothsides -1+1+R=1.3-1 R=0.3*100 R =30%

[@venkatachalamv3826]

seriously wow!! one should teach at such a basic level to make people understand. The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project. For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project. Thank you so much!!

[@EOCmodernRS]

my question is, how did you find out the IRR was 30%? In this example it is easy because of the numbers, but what if the numbers were more complex and you had several cash flows?

[@shivajireddy5959]

MerchMaster You can either use numerical interpolation through trial and error or just plug in the cash flow equation into a calculator.

[@sarahmuslihah5921]

Calculate it using algebra method

[@VictoriaMusonda-oy7ok]

Thanks u have helped me a lot with proper explanation

[@lennon4044]

I use Delta Business Financial calculator , android but I didn't know what things are meaning . now I got it thank you for your tutorial

[@cureluvkatz]

Thank you, your videos are extremely helpful! Your voice is also very pleasant and easy to listen to. ☺😉

[@Edspira]

Thank you!

[@nathanaelfernandes4169]

What if there's more than 1 year? Do you just add it to the equation?

[@TheMightysimi]

thank you so much it was so clear, but how can i know what discount rate to choose, like here you applied 30% R , what was the reason of applying 30%

[@MLeoM]

Thanks God, you don't know how much you helped me sir, I am preparing for Finance exam and Your video made it very very VERY clear to me. Thank you sir... God Bless you for your good work...

[@Edspira]

Comments like these keep me motivated to keep churning out content. I hope you did well on your exam. Best of luck to you!

[@graffitifreak333]

my mba proffessor sucks, this was helpful

[@michaelpisciarino5348]

0:25 If NPV > 0, Accept, If Not, Don't Accept 1:00 Ex. Project 5:00 If R>r, Accept

[@likquidsteel]

The IRR and NPV equations are identical with the exception that you're solving for a different variable. Therefore, as the rate (call it R or r) goes up, your NPV decreases. When you get to NPV=0, the "R or r" at that point is 30%. Can you please explain, why your rate of return continues to increase if your project's NPV goes negative (implying destruction of firm value)? Conceptually, I can't wrap my brain around this. Thank you for your videos.

[@amath.6129]

likquidsteel Taken from a mathematical angle, the higher the denominator, the IRR in this case, the smaller the result. From a finance angle, notice that this is a discounting rate; not a compounding rate. The NPV is basically the sum of the discounted present values of the cash inflows. You're "stripping" an invested sum of money in the future, at a specific rate, of its interest and sorta bringing it to the now where it hasn't been invested yet. So, the higher the IRR, the more "stripped" the money is; consequently, the smaller the amount now, the NPV. I hope you have a better understanding of it now.

[@venkatachalamv3826]

The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project. For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project.

[@adityaprasad465]

@@venkatachalamv3826 Yes! This is what should have been explained in the video.

[@goodnessprevail302]

@@adityaprasad465 Thank you!! :)

[@alovea69]

Bro u r so helpful! Clear and precise thanks man GOD bless you

[@muhammadbaqrain6609]

Brillant! I wish I could meet you one day. Saving us since years ♥️

[@Bubbli1989]

how did you add -100 to 130/1.08 in NPV Example without taking into affect the rule of adding Fractions?????????

[@racerx1326]

Great video-Thank you. But actually made me a bit more confused. You state IRR is condition which sets the NPV = 0. We know in the case of NPV that an investment should ONLY be made if NPV > 0. So shouldn't the decision rule for IRR be that if the rate of return is GREATER than IRR then an investment should be made?

[@venusfrith2864]

To understand this more fully you should first understand the relationship between interest rates and present values. As with bond valuation, the higher the discount rate the lower the present value. With NPV this also means the higher the discount rate the lower the NPV. Now with IRR (which in fact is a hypothetical rate to determine break even position, i.e. NPV=0) if it is greater than the discount rate then this would mean the NPV associated with the actual discount rate would be >0, accept. Conversely, if the IRR is less than the discount rate then the NPV associated with the true discount rate will be

[@Takitza]

@@venusfrith2864 so well explained. Thank you mate!

[@loyisopayi9524]

Good day, Based on your example in the video is 130 total inflow? let's take as if in scenario of where you had to draft Beginning of the Project, Annual operation Costs (Tax), End of Business, then you are asked to calculate NPV, IRR, PI, PBP?

[@alexkmile]

Hey! Question to NVP: I really dont understand why We use the profits of our investment instead of the money we invested. Shouldn't we be using the 100 dollars investment, since we would get 108 back if we invested 100 (say we invest in stocks with 8%). How do the opportunity costs have anything to do with the yield our investment generates?

[@alexkmile]

Wilma Agnes Or in other words: Why are our opportunity costs 20,37 and not 22 (130-100*1,08). Love your Channel by the way:)

[@Edspira]

Wilma Agnes Excellent question! When we calculate NPV, we are strictly evaluating a project as if it were a series of cash flows and then discounting those cash flows back to the present time. Cash flow in t=0 is -100 and cash flow in t=1 is 130. We do not have to discount the cash flow in t=0 because it is the present day, but we must discount the cash flow in t=1 by dividing it by one plus the discount rate (in this case, 1+.08). We can view this discount rate as an opportunity cost of capital (the best expected return in the market on an investment of comparable risk and term); thus, receiving $130 cash one year from now is equivalent to receiving $120.37 today (given an 8% return, an initial investment of $120.37 would be worth $130 in one year). Now that we know that the t=1 cash flow we'll be receiving is worth $120.37 in today's dollars (aka the present value), we can combined it with the -100 cash flow in period t=0 (which doesn't need to be discounted because it's happening today) to compute a "net" present value of $20.37. I hope this helps! These concepts can be quite difficult. I hope I didn't make things more confusing :)

[@alexkmile]

Education Unlocked Finally I understand it, thank you so much!!!

[@Edspira]

Wilma Agnes No problem :) I hope you do great in your course! Best wishes!!

[@thandiwemafhoho3898]

thank you so much!!!!!...all the way from South Africa

[@anelegoniwe2341]

which course are doing

[@thandiwemafhoho3898]

Anele Goniwe Business Management (ICB)

[@luqmaanabrahams1971]

Another South African 😀

[@thandiwemafhoho3898]

Luqmaan Abrahams hey!, goodluck with your exams ✌

[@randysimmons7918]

My Question is... if i'm looking to get into Rentals and keep the property, How many years should I put the IRR? Every example I look at shows about 5 years and then selling it

[@Standbyualways]

Thank you so much for sharing your wealth of knowledge.

[@Edspira]

Sure, I'm happy to help!

[@schowdhury9963]

Thank you very much

[@Midara_003]

Thank you very much But how do you do it involving multiple cash flows

[@jackpackage9386]

Maybe a long shot to get a reply, but I think I'm misunderstanding. If an 8% rate gets you positive NPV, which is good, but your IRR is saying you need a 30% return to get an NPV of 0, how does it work that IRR says you need a 30% return, but NPV says an 8% return also gets you to an "accept" decision rule?

[@Azam_Pakistan]

I have a one year project with three poultry flocks having three month cycles each. Three times investment will take place and three times these will be sold. How should I plan for IRR.

[@accgarage2663]

Thank you!

[@jimminie]

Thank you, what if we have multiple cash inflows? do we need to find big Rs of each cash inflow? could u pls clarify? thank you!!

[@itachisama8909]

Respective rate of returns need to be calculated and the one yielding highest'll be selected.Either way to get an idea as to what project is to selected you can discount those inflows to present value and evaluate accordingly

[@KingJoziPranks]

thank you so very much, watching from South Africa

[@MohamedAbdo-xs7bf]

Why using a discounting rate? Am i supposed to use the Cost of Capital to make sure that the net present value would be a profit? If i used alternative returns, like bank interest rate, or alternative return, should it be considered as a net present value before deducting dividends?

[@maryamtoor904]

How did you get R = 30%? Thank you for the video, super super helpful!

[@igorm8706]

by skipping the step to show us how

[@samsonkumwenda4378]

You are a very good teacher 👏 👏 👏 👏 👏

[@cloudengineerande-business8598]

Love your explanation is very clear

[@ragas2845]

Can you show how you got 30% while doing the calculations. Because im a bit lost. Thanks

[@Sparksflymich]

thanking you before i finish watching the video bc it helped so much I'm crying

[@Edspira]

Thank you for this kind note. I hope you do great in your course!

[@shyansheikh]

How do u determine what 2 Discount Factors to use ? I can t really trial and error as there is limited time in my FM exam. I need this to calculate the cost of redeemable debt

[@keepsmiling1603]

Yes, same question that becomes very difficult

[@igitego]

You consider the opportunity cost: if you were to invest the $100 in a savings account for example, how much % interest would you earn?

[@igitego]

@@keepsmiling1603 you consider the opportunity cost of the investment. If you were to keep the money in a saving account, you could earn 12% annual interest for example. You then use 12% as the discount rate.

[@keepsmiling1603]

@@igitego thank u sir

[@igitego]

@@keepsmiling1603 you are welcome

[@MiamiWealthGroup]

After today I know what IRR is thank you. for the video

[@fang1968]

How did you conclude 30% for R?

[@Sushil_by_name_only.]

Thank you professor 🙏 It's Cristal clear now on IRR concept! But I didn't understand how it should be a part of investment decision?

[@Edspira]

Let's say your company has the following decision rule: "we only accept projects with an IRR greater than 15%." In that case, if you calculate the IRR for a project and it is 23%, you would accept the project. Now it's a bit more complicated than that, as it's usually best to do some type of sensitivity analysis, but that's the general idea.

[@talebbagazi1435]

I have a practical problem which I'm a bit confused about it and I need help to solve it. I have made an investment during the past 3 years: In the first year cash out-flow of (30k), in the second year (30k), and in the third year (40k) and Iearned 10% ownership share of the business. How to calculate the NPV and IRR since all my cash were out-flow and? do I use my Pre-money valuation to find the NPV and Post money Valuation to Find the IRR?

[@ftnnrjnnh2792]

finally the explanation that i need. thankyou sir!

[@yolandamkize9076]

Greatly explained, thank youuu.

[@ziqunliu2919]

Thanks a lot, sir! You made my college life easier.

[@Edspira]

You made me smile with this comment :) Happy studies!

[@AnaitiArauz]

WOW you are the best!! Literally my life saver!

[@justintietz1637]

Good video - question though...I am trying to build a model for a residential property investment where there will be an initial cash outflow and then either a net gain (inflow) OR net loss (outflow) each year. Do the principles remain the same? In other words, period 1 = -130, period 2 = 15, period 3 = -5, etc. with a terminal value for when the property is then resold

[@ct7470]

if the IRR of 30% is what makes NPV=0, shouldn't we consider IRRs that are >30%? This way the NPV of our future cash flows is not equal to 0. Please lmk if my rationale is incorrect.

[@missrosie2333]

a really perfect explaination. thank you

[@connorgioiafigliu]

Thank you! Great explanation!

[@abramriccardo9251]

Hi Coach, just wandering, why are we using discount rate instead of interest ?

[@clarathomas6788]

thank you !! you saved my life! :)

[@Edspira]

I'm happy to have helped! Have a great summer!!

[@alonatumpalan9274]

Anyone knows what tool was used here to record this video with that feature to somehow write on the black board?