IRR (internal rate of return on investment) is an indicator of investment profitability (in percent) over a certain period.
IRR is determined in several ways, but the most common method is to compare the NPV (net present value) of an investment project with zero. If the estimated return on investment is higher than the discount rate, the NPV will have a positive value, indicating profitability. If the IRR is below this percentage and the NPV is negative, then it is better not to make investments, since there will be no income from them. IRR is considered one of the most important and necessary indicators for assessing the profitability of an investment and developing management decisions.
Internal rate of return (IRR) is required to analyze the efficiency of investments, financial policy and strategy of the enterprise. The indicator allows to understand what profit in the future banking organizations or investors can have from investing in one project in comparison with others.
Strategic decisions
The following decisions are considered strategic:
The idea of expansion - determining kenya email list the internal rate of return helps to understand what finances need to be invested in a new business in order to achieve its payback and profitability.
Cost-cutting decisions – VNI allows you to see which costs can be cut and by how much.
New projects – the IRR value helps to decide whether it is worth investing in a new startup, comparing the indicators of this project with the profit rate and other parameters of already operating businesses. The index allows both to calculate the return on investment and to estimate the payback period.
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Financial policy of the enterprise
The financial policy of the enterprise includes:
Interest rate calculation – it helps a firm decide what rate to offer investors to keep profitability high.
Optimization of financial use – the IRR indicator allows you to correctly distribute the funds used.
Dividend decision – helps to understand at what time and in what amount to pay income on shares in order to obtain maximum profit and meet the interests of all parties.
IRR is also used to evaluate commercial real estate, investment funds, infrastructure projects, and so on.