Calculation method and Application scenario of Internal rate of return with difference Correction

Margin modified internal rate of return (Differential Adjusted Internal Rate of Return)CatfishfishDAIR) is a measure of the profitability of investment projectsCatfishfishIndex ofCatfishfishIt is closely related to internal rate of return (Internal Rate of Return, IRR). In practical application, DAIR helps to solve the problem of comparing multiple investment schemes, so as to provide investors with a more valuable decision-making basis.

Before we look at how DAIR is calculated, let's review the basic concepts of IRR. The internal rate of return refers to the discount rate that makes the net present value (Net Present Value, NPV) of the project equal to zero. In other words, IRR is a key indicator of the investment return of a project. When the IRR is higher than the expected return of investors, the project is usually considered to be attractive.

The calculation method of DAIR is developed on the basis of IRR. We can compare two or more mutually exclusive investment projects by calculating their DAIR. The specific steps are as follows:

oneCatfishfish. First, calculate the IRR of each project separately.

two。 Then, find the difference between the IRR of the two projects, that is, Δ IRR (Delta IRR).

3. Then, the ratio of Δ IRR to project investment cost, namely Δ IRR / investment cost, is calculated.

4. Finally, the above ratio is added to the IRR of the two projects to get the DAIR.

In order to show the calculation process more intuitively, we can illustrate it through a simple example. Suppose there are two investment projects An and B, whose investment costs are 1 million yuan and 2 million yuan respectively, and the calculated IRR is 20% and 15% respectively.

Based on the above data, we can calculate Δ IRR = 20%-15% = 5%. Next, we calculate the DAIR:

For the project A _ A = 5% + 20% = 25%

For the project BMAI DAIRCUB = 5% + 15% = 20%.

By comparing DAIR_A and DAIR_B, we can conclude that in these two projects, Project A has higher profitability. Therefore, when making investment decisions, investors should give priority to project A.

The application scenarios of DAIR mainly focus on the following aspects:

1. Comparison of investment schemes: when faced with multiple mutually exclusive investment projects, DAIR can help investors evaluate the profitability of each project more accurately and make more informed decisions.

two。 Risk management: DAIR can be used as a reference index to measure project risk, and investors can judge the risk level of the project according to the level of DAIR.

3. Capital budgeting: in the process of corporate capital budgeting, DAIR can be used as a supplementary tool to help enterprises choose the best investment portfolio with limited resources.

In a word, as an investment evaluation tool, difference correction internal rate of return (IRR) has extensive value in practical application. By learning and mastering the calculation method of DAIR and its application scenarios, investors can make investment decisions more scientifically, so as to maintain and increase the value of assets.