Incremental IRR is a way to analyze the financial return when there are two competing investment opportunities involving different amounts of initial investment. In this post we will explore how to calculate incremental IRR and how it helps in deciding between two projects with different investment. Let’s consider a project with following cash flow stream:Assume 10% … [Read more...]
The Curious Case of Negative IRR
Negative IRR indicates that the sum of post-investment cash flows is less than the initial investment; i.e. the non-discounted cash flows add up to a value which is less than the investment. So yes, both in theory and practice negative IRR exists, and it means that an investment loses money at the rate of the negative IRR. In such cases the net present value (NPV) will always … [Read more...]
Shareholder Loan and Equity IRR
Many a time I’m requested to explain the relation between shareholder loan and the equity IRR. Should shareholder loan be part of equity IRR calculation? And if there are more than one equity investor, what should we do! Shareholder loan is a debt-like form of financing provided by the shareholders. Usually, it is the most junior debt in the company's debt portfolio, and since … [Read more...]
How Does Excel Calculate IRR?
Have you ever wondered how does Excel calculate internal rate of return (IRR)? I never gave it second thought until I wrote a post on the issues with NPV calculation in Excel. Our reader, Deyan, pointed that similar type of issue can exist with the IRR calculation in Excel. IRR calculation in Excel is rather simple; it follows the following syntax: Internal Rate of Return = … [Read more...]
NPV Calculation in Excel: Why the Numbers do not Match!
NPV calculation in Excel can be tricky. I have written few posts on this subject - NVP & IRR – Key Metrics of a Feasibility Analysis and Net Present Value and Returns to the Equity Holders. I recommend that you read them too. The basics of net present value (NPV) have been discussed on this site on many occasions. In this post we will be discussing the NPV formula in Excel … [Read more...]