What Is The Rate Of Return Within The IRR?
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IRR or Internal Rate of Return is the internal rate of return. From which we invest money In different projects Which may receive both positive and negative cash flows How fast is each year To put it simply, it is understood Suppose we choose between 1 million baht today and 1 million baht in the next 1 year.
Of course, everyone has to choose 1 million now.
Give examples of evaluating 2 projects in making an investment decision with an investment period of 5 years.
Initial investment is 1 million baht.
1. Project 1 receives money from investment 1-4 years, 100,000 per year. The final year or year 5 will receive 1 million baht in principal plus the cash flow of 300,000 baht. In total, Project 1 has all cash received. 1,700,000 baht.
2. Project 2 receives payment from the 1st year investment of 300,000 baht. Year 2-4 receives 100,000 baht per year. In year 5, the principal will be returned 1 million baht plus the cash flow of 300,000 baht. Project 2 has a total cash flow of 1,700,000 baht.
It can be seen that both projects have cash flow in both projects, which is equal to 1,700,000 baht.
If looking superficially, may not be very different. But if looking into the details Will see that the difference is that Project 1 will receive 300,000 cash flow in year 5, but in Project 2 will receive cash flow faster than that received from the first year of investment
Therefore, IRR of Project 2 is equal to 15.2%, the first project is only 13.08%. Therefore, Project 2 has more return from internal investment.
In conclusion, although any investment that receives the same cash flow With duration And equal investments We have to choose a project that we have received a lot of money in the early years so that we can get the large investment that we got first. May invest in other assets that increase returns Or we remember to calculate it as an IRR by choosing an investment that has a higher IRR or has the idea that “We must make money fast. And lose money slowly ”
IRR returns can be tracked In the next article …
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