Interpretation of internal rate of return terms

Internal rate of return refers to the discount rate that can make the present value of future cash inflow equal to the present value of future cash flow, or make the net present value of investment scheme zero.

Internal rate of return method is a method to evaluate the advantages and disadvantages of the scheme according to the internal rate of return of the scheme itself. If the IRR is greater than the capital cost ratio, the scheme is feasible, and the higher the IRR, the better the scheme.

The calculation of IRR usually requires "step-by-step test method". First, a discount rate is estimated and used to calculate the net present value of the scheme; If the net present value is positive, it means that the yield of the scheme itself exceeds the expected discount rate, and it should be further tested after increasing the discount rate.

If the net present value is negative, it means that the yield of the scheme itself is lower than the expected discount rate, and further testing is needed after reducing the discount rate. After many tests, the discounted value that makes the net present value close to zero is found, which is the internal rate of return of the scheme itself. If you are not satisfied with the accuracy of the test results, you can use "interpolation method" to improve it. ?

? Definition of cash flow:

Cash flow management is an important function of modern enterprise financial activities, and establishing a perfect cash flow management system is an important guarantee to ensure the survival and development of enterprises and improve market competitiveness.

Cash flow is an important concept in modern financial management, which refers to the cash inflow, cash outflow and its total amount generated by certain economic activities (including business activities, investment activities, fund-raising activities and non-recurring projects) in a certain accounting period, that is, the inflow and outflow of cash and cash equivalents in a certain period.

For example: selling goods, providing services, selling fixed assets, recovering investment, borrowing funds, etc. , forming the cash inflow of enterprises; Purchase of goods, acceptance of labor services, purchase and construction of fixed assets, cash investment, repayment of debts, etc. , forming the cash outflow of the enterprise. Cash flow is a very important indicator to measure whether an enterprise is in good operating condition, whether it has enough cash to repay debts and liquidity of assets.

The cash flow in the engineering economy refers to the actual cash inflow, outflow and the difference between inflow and outflow (also known as net cash flow) of the proposed project at various points in the whole project calculation period. General cash flow takes interest period (year, quarter, month, etc.). ) is the time unit and is expressed by cash flow statement or cash flow statement.