Internal rate of return before going any further, I would like to take a disclaimer that I am not eating internal rate of return to the financial to the to the finance students all the accounting and the discussion that we will be having in the next 234 minutes has nothing to do with the finance. So, please do not hold me accountable in terms of that what I have explained to you is not how it actually works when you are actually working on IRR. The concept the discussion here has is directly related to to us as a project manager to understand what ROI is return on investments IRR internet internal rate of returns our our our rate of returns are sorry rate of returns ROI return on investment all these terminologies which you people as a finance, which finance people use for us, to impress us, we should have a clear understanding so that we can question you and you can come up with a little better answers.

The internal rate of return is the interest rate, interest rate, I mean the point value where we will be either getting our money money will be adding every month so, we have 400 in the bank and the rate of interest is five for next year it will be 105 and the next year is 111. And point five something interested at with the project revenues, it is not about profit, please distinguish between revenues and profits and the project costs are equal. So, the project cost is everything. Whatever it is going out in the revenue is in terms of money. The higher the IRR is, the better the project is for IRR cannot be calculated analytically. So, there is no way that you know from mean it has to go brute force trial and error, you need to check every IRR every value and then cut down then you are checking at five then you will check at 10 then you will check at seven.

There are definitely Excel formulas and the scientific calculators are available which could help you to get this money to get this value but the IRR is basically trial and error. IRR is uniform for investment. For varying types you can do a lot of investments. Although the IRR is also known known as economic rate of return, or a discounted cash flow rate of return to the required rate of return IRR. The higher the IRR is the better Dyer is the better. But let's say the IRR is 10% but are you as an organization is your own Organization willing to invest in this amount?

No. So, the rrr is the minimum acceptable rate of return for an organization. So, if they say 18% is our rrr we need to look for what are the projects which are aware where IRR IRR internal rate of return is greater than r r r which is 10% or 15% requirement of an organization you cannot use IRR IRR without the use of net present value because we need to understand what is the net present value. Future values can be it can be used to work multiple prospective of the projects and relatively So, if you have multiple projects where the output in terms of cost investment is same, then oh If the project is returning over the period of time, that is one negative point or you could say downside of IRR is that it works on the initial investment and then return over the period of time for the project with the highest IRR, you will able to identify that it is the best way of doing it.

We need to as I said, as an organization, you have to establish the required rate of return. So that you know that what is the point where that you you as an organization can move into the case initiate this project or this initiative. This is an example you can see, to identify that cash flow or identify the net present value or identify the IRR for an organization you have to add all the future net flows. Purchase sky flow one cash flow two cash flow free cash flow forecasts. Then sum it up to make the net present value zero. If the net present value is higher or a negative, it is not what we are looking at we need to make sure that it remains zero.

So, CFO is inverse initial investment. CSR is a cash flows for the future years and is the number of periods that you are looking at obviously, no project goes for unlimited number of years. Net Present Value is what is the present value of something that you will get after five years or 10 years, 11 years or 15 years. And IRR is the rate of return that we are actually testing. I have given you one example that if you do an initial investment of 600,000, and annual profit the next few years is 150,000. And you are expecting that when you will close this project, you could sell the equipment or the machinery like laptops, lights and everything in terms of nine thousand or 20,000 as a round figure, then what at what rate this what is the IRR for it.

So if you calculate this, the IRR for this is almost 24% let's say your your internal rate of IRR are the rate of return is 15%. So you would definitely go invest in 24%. Though it may look like that initial investment is very high, which is a 300,000. The IRR allows managers to rank projects by their overall returns rates of return. If the IRR is higher, it is better than next then next then next. But obviously there are multiple other parameters in terms of getting or any starting an initiative or starting a project or investing an amount is your personal likeliness the capability the capacities of an organ the capacity of an organization The number of years that you will be investing and the number of years you will be in, in how many years the profits will start coming in.

All these and many other variables will play a role while selecting a project IRR is best suited as I told you for venture capital and private equity investments, because what they do they give you a money of 500,000 or 100,000. And then you need to return them you need to return the amount over the period of time in terms of interest rates in terms of profit. IRR is also a good unit as if you and I try to understand in a really mean layman term not a completely layman term is that car values. We buy a car on a monthly leasing amount. So the company consider and they calculate the IRR for them because that they have to buy they are not investing multiple amounts multiplayer for you yet. You are giving multiple returns, but they are getting the amount we are buying the car in hundred thousand on the day one.

So, now they have invested a 100,000 and they are asking you to pay for four years 7000 7000 7000 7000 per month. So, this is how it works, it usually works better when it has one cash out and multiple cash and so, you have rate of return which is ROI or required rate of return which is rrr net present value borrowing costs obviously money is not free whatever you will borrow. So let's say you have taken money from the bank and they are asking for the return of 7% for any project which is 14% or 20% giving you a result your return is not 20%. So you have a borrowing costs of 7%. So your return is 13% which means you will save the amount you have taken the amount from the bank or from me at the rate of 7% and your returns are 5% of 4% which means you are actually losing the amount on on your project.

So, this is how you identify and understand and quickly prioritize your investments. And then obviously finance comes in and play their role in terms of getting into a lot of additional details and the business case starts in the feasibility starts all these things starts after you have the initial understanding of the project. This is where I conclude my discussion on IR