Internal Rate of Return (IRR) and Net Present Value (NPV)
Math Easy Solutions
In this video I go over through some basics in economics and financing and discuss the Internal Rate of Return (IRR) as well as derive the formula for the Net Present Value (NPV). In financial budgeting and investment analysis, to compare different projects or investments the interest rate at which all current and future cash flows break even in terms of their present values is called the internal rate of return (IRR) and is simply an interest or discount rate. The Present Value (PV) is the value of any future cash flows but set to the date of valuation. The value of money increases with time so $1 today is worth more than $1 tomorrow due to the ability to gain value through interest. The NPV is simply the sum of all the PVs and when equal to 0, the corresponding interest rate is the IRR.
In this video I go over an example in which I derive the NPV formula and solve for the IRR using a Microsoft Excel spreadsheet to manipulate the IRR until the NPV = 0. This is a very useful introductory video to financing and investing so make sure to watch it!
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