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đ´ EASIEST IRR Internal Rate of Return, How to Calculate IRR Formula and Calculation (Idiot Proof!) - YouTube
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IRR Internal Rate of Return Explained in 3
Easy Steps:
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How to Calculate Internal Rate of Return
Hello and welcome once again to MBABULLSHIT.COM.
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Our topic for this video is the Internal Rate
of Return, also known as the IRR.
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I know it looks a bit scary, but itâs really
just bullshit.
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I will show you how itâs very easy.
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Remember that you can always come back to
MBABULLSHIT.COM.
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Before you watch this video, I highly recommend
(itâs not a requirement) that you first
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know future, present value, and net value
before you watch this video.
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Before you learn IRR, you should first understand
the simple ârate of returnâ.
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This refers to the speed that money comes
back to you after you invest it.
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Letâs say you give / put money in a business
or deposit in a bank, and you get back profit.
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How fast does your money come back to you
after youâve invested / deposited it?
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More on that later.
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This rate of return is written as a
percentage per year, also know as P.A. or
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per annum.
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As an example, letâs say that you invest
$100 today and then you get
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back $3 every year forever.
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In this case, we can say that the rate of
return is 3% per year.
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Why is it 3%?
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Because $3 is exactly 3% of $100 and youâre
getting it per year or per annum.
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In this case, the rate of return is 3% per
annum.
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You see, itâs very simple.
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You donât even need a formula in this case.
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You can easily estimate that earning $3 per
year forever after a $100 investment equals
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3% per year rate of return.
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Now we ask ourselves, what if the situation
is not that easy and simple?
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For example, what if you invest $100 today
and you get back $60 after 1 year, and you
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get back another $60 after 2 years, and then
the money you get stops unlike in the past
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example where you get money forever.
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In this case, how do we compute the rate of
return?
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In this case, the rate of return is hidden.
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This means itâs not easy to see the rate
of return.
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In MBABULLSHIT language, another word
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for âhiddenâ is âinternalâ.
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The word âhiddenâ doesnât sound so beautiful.
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So now we call it the âinternal rate
of returnâ or IRR.
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In order to get the Internal Rate of Return,
we need to use a formula.
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Before we go to the formula, I want you to
think about the future cash outflow and the
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future cash inflow.
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The future cash outflow was $100 that youâre
investing.
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The inflow is $60 that you get, and another
$60.
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Think about the outflow and inflow.
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Then think about the value today using
the
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present value formula.
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It will look something like this:
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Do you remember this?
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This is very similar to the present value
formula.
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First, which here is the cash outflow and
which is the cash inflow?
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The cash outflow is the $100 investment and
you would notice that it is negative $100.
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Why is it negative?
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Because you are investing it or you are paying
it.
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When you invest money, you take money away
from yourself to put in a bank or in a business.
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In a way, you are losing money, maybe temporarily,
but you are losing moneyâŚ
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thatâs why it is negative.
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For the cash inflow, it is $60 for the first
year and another $60 for the second year.
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It is positive because it increases the money
you have and you get the money bank.
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Next, we still donât know the ârâ or
the rate of return here because thatâs what
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weâre trying to find out.
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We want to find out what ârâ is over here.
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