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What is the internal rate of return?

The internal rate of return on an investment is the interest rate that will make the present value of all cash flows from that investment equal to zero. That is, for any positive net cash flow (a return on your initial investment), there must be a negative net cash flow that “cancels it out.” It is a financial metric used in finance to measure the profitability of investments or projects by finding the discount rate that will make all future cash flows equal. It was created by Irving Fisher in 1926, but he didn’t publish it until 1932. His idea was that changes in “prices” are not quite the same as changes in “prices plus change”. He came up with this within an era where interest rates were really interest minus change, but it’s still a good metric even today for comparing returns with different levels of risk.

IRR, or Internal Rate of Return, is a measure of how valuable an investment is at the end of its life. It’s calculated by taking the initial periodic payment (Pv), subtracting time value of money (T), and dividing by the capital invested (K).

The process is identical to “Simple Interest” calculation; except instead of having an annual interest rate, it has for IRR. Capital X = PV x (1 + IRR)^n, where n is the number of years in length.

The IRR is a useful tool for a company to use in deciding whether a project should be undertaken or not. If the IRR is greater than the cost of capital, it is worthwhile undertaking.

The key difference between ordinary return and IRR is that the Internal Rate of Return accounts for both the level of risk and time, making it a very useful tool for determining whether a specific project or venture is likely to be profitable.

Project Evaluation Using IRR Calculation

In finance, IRR is commonly used to evaluate investment decisions. In this regard, it gives a good indication as to whether the investment will result in profit or loss without having to wait until the end of the investment period as would be required by other methods such as Net Present Value (NPV) or Payback. IRR is also used to determine the amount of capital you require for a project.

How does Internal Rate of Return help with evaluating projects?

Projects with a high IRR are obviously preferred over others, because they will generate higher returns for the same level of risk. Moreover, calculating IRR is useful for understanding how changes in key inputs can affect project returns. For example, say you are an investor and you have the option of investing in two projects A and B. Project A is more risky than B but it also has higher returns than B. If both projects had an IRR of 20%, Project A would be preferable to Project B given that there’s no information on the risks of each project.

Understanding IRR Calculation

If we were to use IRR to compare two investment opportunities, we would need to know:
The cost of capital: This is a fixed percentage that includes all the costs associated with an investment such as: interest and fees for borrowing money, the opportunity cost of the capital used from other investments, etc. The risk involved with each project A and B: i.e. the risk that an investment will not bring any profits

How would we set each of these factors? Let’s consider Project A first. We know the cost of capital is 6%. We also know that for this particular type of project, it has a standard return rate of 20% so if we take the opportunity cost, it should be 6% x 20% = 120%. This is what you would expect to pay to invest in this type of business, knowing that you can get a 20% return. For Project B, because it has a higher risk level than Project A, its opportunity cost should be lower which means its cost of capital will also be lower at 5%. Therefore, you can calculate the IRR for both investments as follows:

IRR of Project A = (20% – 6%) / 6% = 14.67% IRR of Project B = (15% – 5%) / 5% = 20%

Because riskier projects should have a lower return, you can see from the above example that Project B is the preferred investment when compared to Project A.

In conclusion, calculating IRR has several advantages over other calculations such as NPV and Payback. Not only does it help with decision making, but it is also useful for understanding how risks affect return and the difference in return between projects is determined by the choice of discount rate.

Hire the best IRR calculation specialists in 2,900+ industries

Fintalent is the invite-only community for top-tier M&A and Strategy talent. Hire global IRR calculation consultants with extensive experience in over 2,900 industries. Our platform allows you to build your team of independent IRR calculation specialists in 48 hours. Welcome to the future of M&A!

Why hire top IRR calculation experts?

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Hire efficiently. Your M&A team is ready in 2 days or less.​​​​

Specialized Skills​

Fintalents are best-in-class - and specialized in 2,900+ industries.​

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Frequently asked questions

Most frequent questions and answers

What clients usually engage your IRR calculation Consultants?

We work with clients from all over the world. Our clients range from enterprise and corporate clients to companies that are backed by Private Equity or Venture Capital funds. Furthermore, we work directly with Family Offices, Private Equity firms, and Asset Managers. Most of our enterprise clients have dedicated Corporate Development, M&A, and Strategy divisions which are utilizing our pool of IRR calculation talent to add on-demand and flexible resources, expertise, or staff to their in-house team.

How is Fintalent different?

Fintalent is not a staffing agency. We are a community of best-in-class IRR calculation professionals, highly specialized within their domains. We have streamlined the process of engaging the best IRR calculation talent and are able to provide clients with IRR calculation professionals within 48 hours of first engaging them. We believe that our platform provides more value for Corporates, Ventures, Private Equity and Venture Capital firms, and Family Offices.

Our Hiring Process – What do ‘Community-Approach’ and ‘Invite-to-Apply’ mean?

‘Invite-to-Apply’ is the process by which we shortlist candidates for the majority of projects on our platform. Often, due to the confidential nature of our clients’ projects, we do not release projects to our whole platform but using the matching technology and expertise of our internal team we select candidates who are the best fit for our clients’ needs. This approach also ensures engagement with our community of professionals on the Fintalent platform, and is a benefit both to our clients and independent professionals, as our freelancers have direct access to the roles best suited to their skills and are more likely to take an interest in a project if they have been sought out directly. In addition, if a member of our community is unavailable for a project but knows someone whose skill set perfectly fits the brief, they are able to invite them to apply for the role, utilizing the personal networks of each talent on our platform.

Which skills and expertise do your Fintalents have?

The Fintalents are hand-picked and vetted IRR calculation professionals, speak over 55 languages, and have professional experience in all geographical markets. Our IRR calculation consultants’ experience ranges from 3+ years as analysts at top investment banks and Strategy consultancies, to later career C-level executives. The average working experience is 6.9 years and 80% of all Fintalents range from 3-12 years into their careers.

Our IRR calculation consultants have experience in leading firms as well as interfacing with clients and wider corporate structures and management. What makes our IRR calculation talent pool stand out is the fact that they have technical backgrounds in over 2,900 industries.

How does the screening and onboarding of your IRR calculation talent work?

Fintalent.io is an invite-only platform and we believe in the power of referrals and a closed-loop community. Members of our community are able to invite a small number of professionals onto the platform. In addition, our team actively scouts for the best talent who have experience in investment banking or have worked at a global top management consultancy. All of our community-referred talent and scouted talent are subject to a rigorous screening process. As such, over the last 18 months totaling more than 750 hours of onboarding calls, of which only 40% have received an invite-link after the call.

What happens if I am not satisfied with my IRR calculation consultant’s work?

During your initial engagement with a member of our Fintalent talent pool with no risk. If you are not satisfied with the quality of your hire for any reason then we are able to find a replacement at short notice. There is no minimum commitment per project, but generally projects last at least 5 days and can last 12+ months.

Interested in our invite-only community of tier-1 IRR calculation experts?

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