# Internal Rate of Return (IRR) of An Investment

Internal Rate of Return (IRR) shows the actual percentage rate of return from the investment with taking discounting into consideration.

# Why is Internal Rate of Return (IRR) of a project important?

Internal Rate of Return (IRR) gives the rate of discount that yields Net Present Value (NPV) of zero considering the time value of money as it employs the discounting concept.

It uses discounted Cash Flows. Discounted Cash Flows are present values of future Cash Flows.

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# Example of calculating Discounted Payback Period from Investment

A business is thinking about purchasing a new machine at a cost of USD\$5,000,000. The machine is going to be used for four years to produce products. The rate of discount to be used was set by the manager at 10% as inflation in the country was forecasted by the central bank to be around 10% in the next few years. The annual Net Cash Flows are showed below. What is the Discounted Payback Period for this investment?

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# How to calculate Discounted Payback Period?

STEP 1: Discount (bring to the present value) the Net Cash Flows that will occur during each year of the project. Discounted Net Cash Flow is calculated by multiplying Net Cash Flow by a Discount Factor (%). Remember that:

Net Cash Flows = Cash Inflows - Cash Outflows

STEP 2: Once you have calculated the Discounted Net Cash Flows for each period of the project, you can subtract them from Initial Cost of Investment until you arrive at zero in order to obtain Discounted Payback Period.

The Initial Cost of Investment which is the original amount invested in the project is also often referred to as the principal.

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# Blogs About Investing on the Stock Market

Here is my personal list of interesting blogs about investing on the stock market. These are not purely investment blogs, but their authors rather focus on the overview of how the whole stock market works, wealth management and economics in general.

The websites on the following list are my favorite blogs about stock market investing. They consist valuable information on financial management, investments in different asset classes, modern financial markets, investor psychology, personal finance using data analysis, portfolio management, financial planning and asset management, etc.

These blogs truly are the best of the best when it comes to investing on the stock market! I hope you will like them too.

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# Net Present Value (NPV) of An Investment

Net Present Value (NPV) shows the cash value return from the investment with taking discounting into consideration.

# Why is Net Present Value (NPV) of a project important?

Net Present Value (NPV) gives today’s numerical cash value of the estimated future Net Cash Flows (or Net Profits) resulting from an investment considering the time value of money as it employs the discounting concept. Or simply, net earnings in USD\$ from the investment adjusted for inflation.

It uses discounted Cash Flows. Discounted Cash Flows are present values of future Cash Flows.

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# How to do discounting?

In order to do discounting properly, you shall use the discount factors to obtain present values of future Net Cash Flows. You need to multiply the Net Cash Flow by the appropriate discount factor from the discount table.

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# The present value of future money

Discounting takes ‘time value of money’ into consideration. Time value of money means that USD\$1 in hand today is worth more than USD\$1 promised at some time in the future.

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# What Is Discounting?

Discounting is the process of bringing to the present value the future Net Cash Flows that will occur during the lifetime of the project. Specifically, reducing the value of future Net Cash Flows (or net profits) to give them their current value in today’s terms.

In this way, different investment projects can be compared with each other by considering today’s value of their future cash returns.

Discounting is the opposite to compounding.