From: Natalie Klein Date: 2008-02-10T02:11:05+09:00 Subject: Re: Internal Rate of Return (#156) Yes, you want the NPV to be zero... so you really just have to solve for IRR. Another good thing pointed out in the article which I wish I'd read before trying to solve it generally is that you can't solve it in general with a formula :-P On Feb 9, 2008, at 10:04 AM, Christopher Dicely wrote: > 2008/2/8 Matthew Moss : >>> Internal Rate of Return (IRR -http://en.wikipedia.org/wiki/Internal_rate_of_return) >>> is a common financial >>> metric, used by investment firms to predict the profitability of a >>> company or >>> project. Finding the IRR of a company amounts to solving for it in >>> the equation >>> for Net Present Value (NPV -http://en.wikipedia.org/wiki/Net_present_value) >>> , >>> another valuable decision-making metric: >>> >>> N C_t >>> NPV = Σ ------------ >>> t=0 (1 + IRR)**t >>> >>> This week's quiz is to calculate the IRR for any given variable- >>> length list of >>> numbers, which represent yearly cash flows, the C_t's in the >>> formula above: C_0, >>> C_1, etc. (C_0 is typically a negative value, corresponding to the >>> initial >>> investment into the project.) From the example in the Wikipedia >>> article >>> (http://en.wikipedia.org/wiki/Internal_rate_of_return), for >>> instance, you should >>> be able to produce a rate of 17.09% (to four decimal places, let's >>> say) from >>> this or a similar command: >>> >>> irr([-100,+30,+35,+40,+45]) >>> => 0.1709... >> >> >> I think one point, which isn't brought out here and not well in the >> wikipedia article either, is that given all of the C_t, you still >> have >> two unknowns: IRR (which we are attempting to solve for) and NPV. >> >> In this case, you want NPV set to zero in order to solve for IRR. Or >> did I miss something? > > Isn't IRR defined as the discount rate that results in an NPV of 0?