The Rules and Models to Estimate IRR Conveniently and Effectively

Abstract

The internal rate of return (IRR) on a project is becoming a more popular and generally accepted criterion which is used to evaluate whether the project has any feasibility in finance, so it is desiderated to estimate the level of IRR as conveniently and effectively as possible. But IRR mainly depends on the periods of the investment project and its cash-flow distribution characteristics in each period, the choice of the initial estimated value of IRR will have effect on the discount rate used in the follow-up tests and the total times of the tests, then, will further influence IRR measured with the interpolation method. This paper give different rule to solute the above question according to cash-flow distribution characteristics: 1) use the simple arithmetic average rule to estimate IRR on a standard cash-flow project, and 2) use the geometric average rule(a compound interest discounted model) to estimate IRR a normal cash-flow project. As the internal rate of return (IRR) on an investment project is considered to be able to measure its realizable return level of the investment project in considering the conditions of the reinvested returns, IRR has gradually become an important indicator to judge whether the project has financial feasibility in the field of economic management since the 1990s IRR. Regrettably, existing literatures have yet to provide a rapid, effective scientific method of measuring the initial estimated value of IRR, so many people feel frustrated against the process of calculating the IRR in practice.