Interest Rate Of Return Calculator
Interest Rate of return to is the Net Present Value. The Net present Value equal to first Cash flow Initial Investment .Added to Every other cash flow will be either positive or negative expenses Divided to number of value 1 added to discount.
The formula us,
NPV = -C₀ + ∑ [Cᵢ / (1 + r)ⁱ], where i = 1…n
let us consider,
- NPV stands for the net present value of the investment.
- The first cash flow C₀ – your Initial Investment
- Every other cash flow Cᵢ will be either positive (income) or negative (expenses). Each year, you have to increase the i value by 1.
- n is the number of periods (typically years) between now and the moment when you will receive your money.
- r is the discount rate (interest rate used in cash flow analysis).
IRR is a discount rate for NPV equal to zero. Calculate IRR
The equipment or use her money to invest in her friend’s coffee shop with an expected return of 12%.
0 = -C₀ + ∑ [Cᵢ / (1 + IRR)ⁱ], where i = 1…n
Or, if you don’t want to use the summation notation,
0 = -C₀ + C₁ / (1 + IRR) + C₂ / (1 + IRR)² + C₃ / (1 + IRR)³ + … + Cn / (1 + IRR)ⁿ
0 = -6000 + 2000 / (1 + IRR) + 2000 / (1 + IRR)² + 2000 / (1 + IRR)³ + 2000 / (1 + IRR)⁴ + 2000 / (1 + IRR)⁵ + 1000 / (1 + IRR)⁶
IRR metric in this case is 22.22%.