Detailed explanation of the calculation method of internal rate of return of installment payment

Introduction

In modern financial activities, installment payment has become a common way of payment. Internal rate of return (IRR) is an important index to evaluate the profitability of investment projects. This article will interpret the calculation method of internal rate of return of installment payment in detail to help you better understand and apply this concept.

What is internal rate of return (IRR)

Internal rate of return (Internal Rate of Return, referred to as IRR) is the discount rate that makes the net present value (NPV) of an investment project zero. In other words, IRR is the expected rate of return of an investment project without considering the value of time. When the IRR is higher than the minimum rate of return required by investors, the project is usually considered to have investment value.

The basic concept of installment payment

Installment payment means that when purchasing goods or services, consumers can divide the payment into several installments. This way can reduce the payment pressure of consumers and increase their willingness to buy. The main parameters involved in installment payment includeFishtablearcadenearmeThe installment amount, the number of installments, the interest rate and the payment time of each installment.

Calculation method of Internal rate of return for installment payment

Calculating the internal rate of return of installment payment needs to be solved according to the known installment amount, the number of installments and the interest rate. The following are the formulas and steps required in the calculation process:

Parameter description A1, A2FishtablearcadenearmeAn the amount received by installments r the discount rate (i.e. the internal rate of return IRR) n the number of instalments

1. First, calculate the present value of each period (PV) based on the known installment amount, number of issues, and interest rate:

PV = A1 / (1 / r) + A2 / (1 / r) ^ 2 +... + An / (1 / r) ^ n

two。 Secondly, the IRR is solved by iterative method or other numerical methods. To put it simply, it is necessary to find an r value such that the sum of PV in the above formula is equal to the investment cost.

Case analysis

Suppose a consumer buys a home appliance worth 10000 yuan and chooses to pay in 12 installments with an interest rate of 1% per period. Now we are going to calculate the internal rate of return of this installment method.

The amount received by installments (A) 1 883.33 yuan 2 883.33 yuan 3 883.33 yuan. 12 883.33 yuan

According to the above table, we can calculate the present value of each period and solve the IRR by iterative method. Suppose that after calculation, we get an internal rate of return of 6.3%. This means that consumers actually bear an average annualized rate of return of 6.3% under this installment.

Conclusion

Understanding how to calculate the internal rate of return on installments is of great significance for evaluating the profitability of investment projects and consumer credit products. By mastering this calculation method, investors and consumers can make decisions more rationally.