OK, so now that we have calculated a net present value, the next logical task should be to calculate
the internal rate of return.
And lucky for us that we already have a project cash here that we have done in the last lecture and
even the year that we already have the net present value of this cash flows at a discount rate of 10
percent.
So to calculate internal rate of return, the first thing that we have to do is that we have to have
another net present value at another discount rate.
So we'll just copy paste this all the work here to another to another part of Sheeter and I will change
the discount rate to 20 percent and as a price and everything will be updated to net present value because
everything was in exile.
So the press enter now and here you go.
So your new net present value is triple one nine in negative.
OK, so what we have to do next is that we have to find out the formula for an internal rate of return
and to calculate that.
But before that, just to remind you, what exactly is internal rate of return?
Internal rate of return is the exact projected rate that the project earns.
So what does that mean?
You can see that here the project was earning positive net present value at 10 percent.
So I could say that my project was earning more than 10 percent here.
My project has giving me the net present value in negative at 20 percent so I can see that my project
is giving me less than 20 percent return.
So what exactly is the internal rate of return?
Internal rate of return is that this year for a discounted cash flow rate at which entry becomes zero,
which means this project is earning exactly what gets discounted and to calculate the discount rate
and then download it on behalf of this formula here.
So I just heard this as well.
And this we have to use this formula to calculate our internal rate of return.
So if I can take the values here, you can see that we have to have two discount rates are lower discount
rate and a higher discount rate.
And then we have to have to increase and be the discount rate and B, A, discount rate.
B, so let's basically fill the values.
I would say that my eight, if I can just make it a little smaller, I can take the cell here.
OK, so I would say that my this give me one more second please.
Yes.
OK, so my R.A. and then I have to find Arby and then I have to find an aide that is basically NBPA
and then I have to find the net present value B so r e is the lower discount rates.
I will just give the cell reference here.
I will just write it this way so that I can also change it and analyze it later.
So I would say this is 10 percent.
Let me change this to percentage.
All right, and now for here, I will also be giving the reference here.
This is the higher discount rate.
And then and again, I have to change the reference here, OK?
And then I have to calculate the net present value at a discount today.
That is nine just for one.
And then I have to give the net present value at discount would be that is basically this one.
So that is our internal rate of return data.
And now let's use this data to calculate the internal rate of return here.
So, OK, so let's calculate the internal rate of return now and we have to follow this formula that
is given here.
So first of all, we have to see are a plus and then record open that is NPV and then we have to divide
and then we have to open the bracket again for the denominator.
And then because NPV a minus NPB don't consider minus 10, it would be automatically handled and then
closed the record and we have to open and close another bracket.
So we'll have to go back and open and close as close to the record, the first one and then no other.
Multiply this whole thing with our B minus R, which is basically this minus this and now that's close
to bracket and press enter.
So here we have eighteen point nine six zero percent.
So our internal rate of return is eighteen point nine six percent.
Now, even though this answer is acceptable, one thing we have to do is start to calculate a good estimate
of Haggada.
Since this is not a linear mathematics nobody thought of.
That is quite a finance discussion.
So I will not go into that.
But what I would like to show you is that I can improve the internal rate of return.
I can change this value just by changing the discount rate here.
So if I can go to 12 percent here or maybe 15 percent here, you will see that there is a small change.
And if I can go even higher, if I go to 18 percent, you will see that the interest rate with the IRR
is changing here.
And if I can change this value as well, if I can come to 19 percent here year, you will see that the
value will still be changing again.
And here you go.
So eighteen point seven nine percent is the internal rate of return, which I have.
This is the best estimate.
So what we have calculated, an internal rate of return just a few minutes ago was a few seconds ago.
That was acceptable, definitely.
But a better estimate of IRR is the one where you have to do discount rates, one positive to discount
rates, having an NPV, which is closer to zero and one is the positive NPV and second is negative NPV.
So this is a little complex discussion.
I'm just you know, this is a finance discussion if we know that.
But what I'm trying to tell you is that even if you don't know all of that, if you are working Microsoft
Excel formula, everything will be handled for you automatically.
So if I can just show you how that is going to work, if I can distribute the formula first.
So here we have the formula, our equals values plus guess.
So there is only one in particular that is value.
So will go here and I will say equals IRR and press time and values only needs to know for this year.
Our calculation are the values here and I will say all of these are the values and I will press control,
enter and exit.
Well sorry, what is happening.
So values are basically this one maybe and control enter.
OK, so that is the IRR.
I will just give some decimals here so that you can see that we have the same values here.
OK.
So eighteen point seven nine two percent.
This is actually the exact IRR that you can find mathematically if you were working manually.
We have to find multiple languages and we have to choose the ones we're done.
Sort of NPV are very much close to zero.
But if you are using IRR formula in Microsoft Excel, all you have to do is that you have to give them
a range of values and IRR formula will take care of everything.
So I hope that was some really magical formula that you will as you will find it.
So I hope you enjoyed the video.