To invest or not to invest?

Capital investments are big and tricky decisions for midsized companies. How often have you felt the dilemma before making an investment? How often have you looked back and said, only if I had taken the small risk of investing in that machine or place earlier? Or do you feel scared before making the big spend in business? Do you always feel the need for an appropriate tool that will give you an answer on whether to make the investment or not? IRR or Internal Rate of Return can give you a concrete answer for your capital investments.

What is IRR?
Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

How to use IRR?
Internal rate of return (IRR) is the interest rate at which the net link present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. If the IRR of a new project exceeds a company’s required rate of return, that project is desirable. If IRR falls below the required rate of return, the project should be rejected.

How do I calculate IRR?
There are many online tools for calculating IRR. Say, for instance, Akshay Traders must decide whether to purchase an additional crane for its warehouse for INR 300,000. The investment in warehouse would only last three years, but it is expected to generate INR 150,000 of additional annual profit during those years. Akshay Traders also thinks it can sell the said warehouse afterward for about INR 10,000. Using IRR, Akshay Traders can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%.