Method of Solving
- Tom Fahey (Unlicensed)
- Jacob Mathews (Deactivated)
Owned by Tom Fahey (Unlicensed)
The Internal Rate of Return cannot be solved by rearranging the formula and solving for IRR, but instead must be determined through trial and error. This process starts with a guess and eventually converges on the IRR that results in a difference of zero between the present value and future value.
The formula for the present value is:
MVE
The formula for the future value is:
MVB x (1 + IRR) + CF1 x (1 + IRR) W1 … + CFn x (1+ IRR) Wn
As you can see, the present value equals the future value only when the correct IRR is entered.