Paranaita net present value (NPV) to zero. This condition is necessary for calculating the internal rate of return (IRR). NPV determines the amount of funds that the investor seek to obtain from the project after you pay off the initial investment costs. Since the internal rate of return determines the level of costs, its calculation is not necessary in accounting for profits.
Determine the amount of initial investment that will be invested in the project. This parameter is denoted in the economy with the letter IC or I. it is Also necessary to calculate the estimated amount of input cash flow (CF), i.e. the amount of income from investments. Typically, for calculations we use the value of profit in the first four years of existence of the investment project.
Use the formula for the calculation of the net present value of income to determine the internal rate of return, which must equate to zero. Then solve the resulting equation in which the rate of IRR is unknown. As a rule, to calculate this value use special software, for example, MathСad, which can not only calculate, but also to perform other investment factors. Ideally, you should obtain a graph of NPV from the level of norm of discount (E). The intersection of the function with the axis E and is solution of the equation.
Analyze the resulting value of the internal rate of return. If the given index is greater than or equal to the cost of capital then the investment project is profitable and accepted. If less, then rejected because it means that the capacity of the project is not enough to provide necessary return and return of money.