From: James Koppel <jamesbkoppel@...>
Date: 2008-02-11T01:28:51+09:00
Subject: Re: [QUIZ] Internal Rate of Return (#156)

Here's my solution. I used Newton's method to quickly find the zero of the NPV function.

Unfortunately, my calculus book failed to mention that Newton's method will fail to converge when the function enters a horizontal asymptote if it's moving toward y=0 as it does so, which happens in this function at deeply negative values of IRR. Thus, my solution can be a bit unreliable, especially for negative values of IRR.

Anyway, here's the code:

DX = 1e-4
EPSILON = 1e-7

def nderiv(f)
  lambda {|x| (f[x+DX]-f[x-DX])/(2*DX)}
end

MAX_ITERATIONS = 500
def find_zero(f, start)
  iterations = 0
  f_prime = nderiv(f)
  x = start
  until f[x].abs < EPSILON or (iterations+=1) > MAX_ITERATIONS
    x = x - f[x]/f_prime[x]
  end
  if iterations > MAX_ITERATIONS
    nil
  else
    x
  end
end

def irr(cash_flows)
  net_value = lambda do |irr|
    (0...cash_flows.length).to_a.inject(0) do |s,t|
      s+cash_flows[t]/((1+irr)**t)
    end
  end
  
  find_zero(net_value,0.1) or find_zero(net_value,-0.1)
end

----- Original Message ----
From: Ruby Quiz <james@grayproductions.net>
To: ruby-talk ML <ruby-talk@ruby-lang.org>
Sent: Friday, February 8, 2008 8:01:13 AM
Subject: [QUIZ] Internal Rate of Return (#156)


The 
three 
rules 
of 
Ruby 
Quiz:

1.  
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2.  
Support 
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3.  
Enjoy!

Suggestion:  
A 
[QUIZ] 
in 
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of 
emails 
about 
the 
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Talk 
follow 
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message,
if 
you 
can.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=

by 
Harrison 
Reiser

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...

Keep 
in 
mind 
that 
an 
IRR 
greater 
than 
100% 
is 
possible. 
Extra 
credit 
if 
you 
can
also 
correctly 
handle 
input 
that 
produces 
negative 
rates, 
disregarding 
the 
fact
that 
they 
make 
no 
sense.






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