Advantages and disadvantages of expected internal rate of returnDownloadgamecandycrushsodasagaUnderstand the advantages and disadvantages of investment evaluation indicators
In the field of investment, expected internal rate of return (Internal Rate of Return, IRR) is a widely used investment evaluation index, which can measure the profitability and risk level of investment projects. However, the expected internal rate of return as an investment evaluation tool has both advantages and disadvantages, which will be analyzed in detail in this paper.
Advantages of expected internal rate of return
1. Intuitive and easy to understand: the expected internal rate of return is expressed as a percentage, which is easy for investors to understand. It can directly reflect the profit level of investment projects, and it is convenient for investors to compare and choose.
two。 Consider the time value: the expected internal rate of return takes into account the time value of the investment project, that is, the impact of the time value of the capital on the investment return. This enables investors to assess the profitability of investment projects more accurately.
3. Wide applicability: the expected internal rate of return is suitable for all types of investment projects, including stocks, bonds, real estate, etc., with high practicability.
4. Risk assessment: through the expected internal rate of return, investors can assess the risk of different investment projects. Generally speaking, the higher the expected internal rate of return, the greater the risk of the investment project. Investors can choose appropriate investment projects according to their risk tolerance.
Disadvantages of expected internal rate of return
1. The calculation complexity is high: the calculation of the expected internal rate of return involves the discounted multi-period cash flow, and the calculation process is relatively complex. It may be difficult for investors who do not have professional financial knowledge to master.
two。 Sensitive to unconventional cash flow: the expected internal rate of return is very sensitive to unconventional cash flow (that is, the irregular order of cash inflow and outflow) in the process of calculation. In this case, the expected internal rate of return may not accurately reflect the profitability of the investment project.
3. Multiple solution problem: in some special cases, the expected internal rate of return may have multiple solutions. This brings great trouble to investors and may lead to mistakes in investment decisions.
4. Ignore the project size: the expected internal rate of return only focuses on the profitability of the investment project, ignoring the impact of the project size. In the actual investment process, the project scale is of great significance to the return and risk tolerance of investors.
In order to more intuitively show the advantages and disadvantages of the expected internal rate of returnDownloadgamecandycrushsodasagaWe can design a table for comparison.
Advantages and disadvantages are intuitive, easy to understand, high computational complexity, considering time value sensitive to unconventional cash flow, extensive applicability of multiple solutions, risk assessment ignoring project size.In a word, as an investment evaluation index, the expected internal rate of return has many advantages, but it also has some limitations. When making investment decisions, investors should comprehensively consider the expected internal rate of return and other investment evaluation indicators to make a more rational and comprehensive judgment.