Our app will help you calculate managerial accounting indexes for use as evaluation standards when making capital investments.
When should you use it?
Calculating net present value (NPV) is an excellent tool for dividing funds into multiple projects and making decisions based on total investment amounts.
Calculating internal rate of return (IRR) is helpful for when investment projects are fluctuating independently.
Each valuation method has both strengths and weaknesses.
Example
You receive a bank loan of $10,000 at an interest rate of 5%. You invest that money, yielding the following returns:
$5,000 in the 1st year
$3,000 in the 2nd year
$3,000 in the 3rd year
$1,000 in the 4th year
The NPV of this investment plan is 17.65.
This indicates that investing the current $10,000 will result in a value of $11,765.
The IRR is the interest rate at which the profit on the original $10,000 in this plan, even through the 4th year, will be $0.
The IRR in this case is 0.097797… meaning, if your interest rate is approximately 9%, you will be guaranteed to at least break even.
Your recovery period indicates how many years it will take to recover your initial investment.
Points to consider carefully
This app displays net present value (NPV) and internal rate of return (IRR) as rounded down to the nearest hundredth. In the above example, for instance, 0.097792 would instead be shown as 0.09.
IRR is calculated using Newton’s method.