Analysis of partial rate of return and Internal rate of return

In the financial field, the rate of return is an important index to measure the profitability of investment projects. This paper will introduce the concepts, calculation methods and application scenarios of partial rate of return and internal rate of return to help investors better understand these two important concepts.

Partial rate of return (Incremental Rate of Return)

The partial rate of return refers to the ratio of additional income that can be brought by each project when funds are unevenly distributed among multiple investment projects. The rate of return can help investors understand how to allocate funds to maximize investment returns in the case of limited funds.

The formula for calculating the partial rate of return is as follows:

For example, suppose the investor has two investment projects An and B, and project A needs to invest 1 million yuan, and the expected return is 200000 yuan.WildTigerTwirlProject B requires an investment of 800000 yuan and an expected return of 160000 yuan. Then the rate of return is:

By calculating the rate of return of the department, investors can find that under the limited funds, project A has a higher rate of return, so priority should be given to the allocation of funds to project A.

Internal rate of return (Internal Rate of Return)WildTigerTwirl, IRR)

The internal rate of return is the discount rate that makes the net present value (NPV) of the investment project zero. In other words, the internal rate of return is a measure of the expected return of an investment project. When the internal rate of return of the project is higher than the minimum required rate of return of investors, the investment project is worth investing.

The process of calculating the internal rate of return involves solving an equation about the discount rate, usually with the help of a financial calculator or spreadsheet software. The following are the basic steps for calculating the internal rate of return:

For example, a project requires an investment of 1 million yuan, and the cash flow in the next five years is expected to be 200000 yuan, 300000 yuan, 400000 yuan, 500000 yuan and 600000 yuan respectively. We can calculate through the spreadsheet software that the internal rate of return of the project is about 23.45%.

When making investment decisions, investors should fully consider the calculation results of partial rate of return and internal rate of return in order to achieve the optimal combination of investment projects. At the same time, risk factors, capital cost and other factors need to be considered to ensure that the investment decision is scientific and reasonable.