You have a great idea for a new product that will increase profits or a new system that will reduce the company's costs. But how can you be sure that this idea will pay off your investment? One of the main methods to find out is the IRR analysis.

Any time you propose capital expenditures, you can be sure that senior executives will want to know their return on investment (ROI).

There are many methods you can use to calculate ROI - net present value, payback period, profitability index and internal rate of return or IRR.

Let's figure out how IRR works and in what cases it is better to use it.

What is the internal rate of return?

IRR is the rate at which a project breaks even (i.e. pays for itself).

It is commonly used by financial analysts in conjunction with Net Present Value or NPV. This is because both methods are similar but use different variables.

With NPV, you determine the discount rate for your company, and then calculate the present value of the investment given this rate ().

But for IRR, you calculate the actual return on the project's cash flows and then compare it to your company's barrier rate (i.e. your company's minimum expected rate of return). If the IRR is higher, then the investment is profitable.

How is IRR calculated?

This is not a simple calculation. For example, suppose you propose an investment of CU3,000 that will yield CU1,300. for each year of the next 3 years. You can't just use the total cash flow of CU3,900 (1,300 * 3) to determine the rate of return because it covers a period longer than those 3 years.

Instead, you will have to use an iterative process where you try different barrier rates (or APRs) until your NPV is zero.

To calculate this indicator, you do not need to delve into mathematics, - you can easily calculate it in Excel (function IRR or IRR) or on a financial calculator.

How do companies use it?

Companies typically use both NPV and IRR to value investments.

NPV tells you more about expected profitability, but at the same time, financial analysts " often rely on IRR in presentations to non-financial people».

This is because IRR is much more straightforward and intuitive.

When you speak: “If I have a project where IRR is 14% and our corporate barrier rate is 10%”, your audience thinks: "Oh I understand. We get 4% more profit from this project".

If you were to say that the NPV of this project is CU2 million, your audience would very likely ask to be reminded of what NPV is and might become confused before you even partially explain the meaning of what “The present value of the future cash flows from this investment using our 10% barrier rate exceeds our original investment by CU2 million.”.

The disadvantage of this metric is that IRR is much more conceptual than NPV. Using NPV, you estimate the company's cash income: assuming all assumptions are correct, this project will generate CU2 million. IRR does not give you real money numbers.

Similarly, IRR does not address issues of scale. For example, an IRR of 20% tells you nothing about the amount of money you will receive. Is it 20% of CU1 million? Or from 1 CU? You don't have to be a mathematician to understand that there is a big difference between these numbers.

What mistakes do people make when using IRR?

The biggest mistake is to use IRR exclusively.

It is much better to analyze a project using at least one of the other methods - NPV and/or payback period.

Using this metric alone can lead you to make poor decisions about where to invest your company's hard-earned money, especially when comparing projects that have different timelines.

Let's say you have a 1-year project with an IRR of 20% and a 10-year project with an IRR of 13%. If you base your decision on IRR alone, you can support the 20% IRR project. But that would be a mistake. You are better off with an IRR of 13% for 10 years than 20% for one year if your corporate barrier rate is 10% during that period.

You must also be careful about how IRR takes into account the time value of money. IRR assumes that future cash flows from a project are reinvested in IRR rather than in the company's cost of capital, and therefore this indicator does not accurately reflect the relationship with capital and time value of money as NPV.

Modified internal rate of return (MIRR), which assumes that positive cash flows are reinvested in the firm's capital, more accurately reflects the cost and profitability of the project.

However, you should always use IRR in conjunction with NPV to get a better picture of how much return your investment will bring.

Economics studies the issues of reducing costs in the implementation of the project and maximizing profits. The main focus is on profit.

In financial analysis, many systems have been proposed to evaluate the effectiveness of projects, but in most cases a system of indicators of reduced cash flows is used. One of them is the IRR (Internal Rate of Return). We will analyze the features of this indicator in the article.

What does this indicator mean

In the economic literature, IRR is understood as a certain level of interest at which the present value of invested funds in an investment project is equal to zero.

To make a decision on investing in an investment project, it is important to understand not only how much it will bring, but also how much to invest.

In financial analysis, initially the amount of investment is reduced to the present value, that is NPV is calculated. Next, IRR will be determined, otherwise it sounds like an indicator, called the internal rate of return, which shows the optimal amount of investment in this project.

NPV and IRR indicators represent a complementary system of criteria for evaluating the effectiveness of the implementation of an investment project. Due to the fact that the first value is the amount of income expressed in kind, taking into account the current value of cash. Another value is the rate, upon reaching which the investor will receive a profit.

The calculated IRR is compared with similar rates of return currently in effect on the market. But in this case, it is necessary to take into account the risks and timing of these projects.

For comparisons the rate on a deposit in a banking organization is accepted. The project will be implemented only if the IRR is higher than the average rates for investment projects and deposits.

IRR characterized by two criteria:

1. Cash flows are net investment.
   This means that at the beginning of the investment project, cash flows are exclusively negative, that is, the investor only invests, but does not receive a return. After a certain period, the project acquires positive cash flows. And more during the implementation of the project there are no changes. With the complete completion of the project, the funds should have only a positive character. Otherwise, this criterion is called isolated , since the influence of external and internal factors is not taken into account.
2. mixed streams Money.
   They represent the alternation of negative and positive values ​​​​at the receipt of funds. In this case, economists believe that the application of the IRR method is not possible. Due to the fact that the data obtained in this way lose their reliability. For such cash flows, a modified internal rate of return .

Rules for applying this indicator

In practice, when analyzing investment projects, experts use the results of IRR calculations as follows:

1. To determine the rate of return on an investment project. Participants decide whether there is a need to raise borrowed funds;
2. To evaluate decisions on investment projects. In this case, the obtained results are correlated with the optimal values ​​for a given sector of the economy;
3. To calculate the sustainability of the project. For this, the conditions under which projects will be implemented are changing.

The use of IRR when calculating the profitability of an investment project has a number of disadvantages and advantages.

To positive aspects includes the possibility of comparing investment projects in terms of duration and scale of their activities. But the main advantage of using IRR is the ability to calculate the profitability of investment flows.

disadvantage it is considered when the sign of the cash flow is changed, the calculation of several IRR values, which can give false information. Calculating this indicator, the expert is of the opinion that the funds are reinvested at the percentage that has turned out. But in fact, this does not always correspond to reality.

Based on the criteria for cash inflows to the project, it should be noted that the IRR method should be applied only if there is net income from the implementation of the investment project.

The procedure for calculating the present value indicator (NPV) in Excel is discussed in the following video:

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Procedure and calculation formula

In various sources, there are different interpretations of the formula for calculating IRR, but the following is the "traditional" one:

Expressed value in percentages. Some economists and analysts attribute this to the shortcomings of this assessment of the investment project, while others, on the contrary, referring to the fact that percentage data are easier to interpret, attribute this to dignity.

Apply two types of calculation this indicator:

• graphic;
• arithmetic.

Graphic method is more visual, and is convenient in case of comparing several projects.

Manual calculation indicators characterizing the options for implementing projects are practically not used at present. Excel is most often used, or specialized programs.

Calculation example

As an example, to calculate the internal rate of return, let's take an investment project, the implementation period of which is calculated for 5 years. The initial investment amounted to 45,000 thousand rubles. At the same time, the investor wants to receive at least 18% annually from the project.

The table shows the data for calculating the internal rate of return.

Let's define the discounted cash flow:

Let's define one more value of NPV:

And now we use the IRR formula, which looks like this:

This example shows that the implementation of this project makes sense, since the investor's rate of return was set at 18%, and calculations show that the return on investment will be 40%.

Data analysis

Analysis based to compare IRR with the discount rate (r).

The resulting IRR can lead to three investor decisions:

1. The project is ineffective. Provided that the discount rate turns out to be higher than the calculated IRR, this means that the funds invested in the project will bring losses. The project is recommended to be rejected.
2. Zero effect. The discount rate and the internal rate of return are the same, such a project does not make economic sense, and it is also recommended to reject it.
3. The project is effective. The discount rate turned out to be lower than the IRR, which means that it makes economic sense to implement such a project.

When analyzing the data obtained, one should focus on the source of raising funds for the project. If the investor invests only his own funds, then IRR is his possible income from the project. In the case of attracting funds from commercial banks () IRR should be interpreted as the maximum rate on the loan obligation.

A high rate of internal return indicates the prospects for investment, and a large gap between the normative and established value indicates the margin of safety of this project.

Evaluation of the effectiveness of an investment undertaking is a mandatory procedure before making a final decision on investing in it. There are a number of project analysis methods, among which NPV, IRR, PI, DPP, DP, ARR are considered the most common. Each of these abbreviations is a tool for analyzing the project according to different criteria, which together provide the investor with important information for making an objective investment decision.

The main criteria for evaluating investment projects

The most important thing for people who want to invest their money and make a profit is the calculation of NPV and IRR.

Let's take a look at what these criteria are.

NPV (from English Net Present Value)- net present (current) value. This indicator characterizes the change in cash flows. It is calculated as the difference between all the investments received and the costs of implementing the project (current expenses, repayment of loans, etc.), taking into account the accepted . In other words, with a positive value of this indicator, investors can hope that the cash flows generated by the main activity of the project will cover all costs and bring the expected profit at a level not lower than .

NPV refers to those indicators that can be calculated quickly, immediately after the receipt of an investment proposal. It results in an absolute value, based on which, you can choose the most attractive from several proposals. The following formula is used to calculate the present value:

• CF t is the flow of money for a period of time t ;
• r is the value of the barrier rate;
• CF 0 is the initial cash flow, it is basically equal to the amount of investment capital.

Net cash flow, as a rule, is determined for each line of activity (investment, operating, financial) separately. The most problematic moment is the correct establishment. To calculate it, there are a number of methods (CAPM, WACC, ROE - ROA, Gordon model, risk premium method) on various bases.

The result is very easy to use. If the value is greater than zero, then the proposal is of interest and can be approved. If the indicator is less than zero, this indicates that the project has no prospects to recoup the investment and make a profit. With values ​​close to zero, a positive decision is usually made only when profit is not the only important criterion, but other factors play an important role (entry to a promising market, social component).

If using this tool to compare several initiatives, then the one with the highest NPV is preferable.

IRR (from the English Internal Rate of Return) is the internal rate of return. It represents the maximum allowable value of investments, that is, such a discount rate at which the NPV indicator is equal to zero (the costs of the initiative and the income from it are equal).

As such, there is no separate formula for calculating IRR, it is found by modifying the net present value formula:

• CF is the cash flow generated by the investment project;
• IRR - internal rate of return;
• CF 0 - initial cash flow.

The formula can also take another form, such as:

• n is the number of time intervals;
• It is the amount of investment invested during period t.

However, the most commonly used assessment is by means of a graph, on which the calculated two NPV values ​​are located, one of which is slightly below zero, and the other is slightly higher. The values ​​are connected by a straight line, at the point of its intersection with the abscissa axis, and the indicator value is found that is closest to the real one.

If, as a result of the calculation, the rate of internal profitability is less than the cost of attracting financing (rate of return), then such a project is unprofitable for implementation. Otherwise, it can be taken into development.

Features of key project performance criteria

Since both methods are extremely popular among economists and financiers, it is worth exploring in more detail which of them is able to provide more objective information. Comparative characteristics of the NPV and IRR criteria show that each of these financial instruments has its own strengths and weaknesses.

The distinguishing features of NPV are:

• Direct dependence of the indicator on the scale of the business: the larger the investment and the greater the amount of cash flow, the higher the value of the present value indicator will be.
• Influence on the value of the criterion of the structure of financing by time intervals. If the project goes through all stages of costs (project, initial investment, liquidation costs), then its size is likely to be minimal.
• The influence of the duration of the time lag between investment and the start of operation of the facility, the longer the break, the lower the NPV value. In addition, the dynamics of the barrier rate can greatly affect the discounted amount of investments.

The numerical value of the indicator is mainly influenced by the following factors:

• Discount rate.
• The pace of the production process: less costs - more profit - more revenue.
• The scale of the company, depending on the number of products produced, sales volumes, the amount of investment.

With all the convenience of this calculation method, it is not suitable for comparing investment projects that differ greatly from each other in at least one of the above factors. Therefore, for such comparisons, another, more flexible, criterion is needed.

The advantages of the internal rate of return include:

However, the criterion of the internal rate of return has its drawbacks, among them:

• Impossibility to show the growth of the project cost in absolute terms.
• Difficulty in calculating and the possibility of obtaining an incorrect result with an unsystematic structure of cash flows (with alternating negative and positive values).

Financiers in the NPV - IRR pair prefer to use the second method more, since it does not need to calculate the discount rate, as for the net present value. In addition, the result when determining the internal rate of return is calculated as a percentage, so it is more convenient to use it when comparing relative values ​​(percentages), and the net present value is calculated in monetary terms, respectively, it is less suitable for comparison. While most textbooks state that NPV indicates the amount of added value an initiative creates, it should therefore be preferred.

Often the above key indicators give results that contradict each other. The reason for this may be the discount rate included in the calculation or the non-standard structure of financial flows. At the same time, NPV characterizes the size of future income, and IRR characterizes the rate of its receipt. Which option is better to stay? In this case, financial analysts recommend choosing a fair value criterion, since it takes into account a variable discount rate, and the main goal of investing is the amount of profit, and not the speed of its receipt.

As can be seen from the above, IRR and NPV are key indicators of the effectiveness of an investment proposal. Taking them as a basis, an investor or business owner can also calculate other auxiliary indicators, such as the yield index (PI), (DPP), weighted average investment rate of return (ARR).

Internal rate of return (IRR)

Under internal rate of return, or internal rate of return(IRR) investments understand the value of the discount rate at which NPV project is zero:

IRR = i, at which NPV = f(i) = 0.

The meaning of calculating this coefficient when analyzing the effectiveness of planned investments is as follows. IRR shows the maximum allowable relative level of expenditure that can be associated with a given project. For example, if the project is financed entirely by a loan from a commercial bank, then the value IRR shows the upper limit of the acceptable level of the bank interest rate, the excess of which makes the project unprofitable.

In practice, any enterprise finances its activities from various sources. As a payment for the use of financial resources advanced into the activities of the enterprise, it pays interest, dividends, remuneration, i.e. incurs some reasonable costs to maintain its economic potential. An indicator characterizing the relative level of these incomes can be called at the price of (attracting) capital(capital cost, CC). This indicator reflects the minimum return on the capital invested in its activities, its profitability and is calculated by the formula arithmetic weighted average.

The economic meaning of this indicator is as follows: the enterprise can make any decisions of an investment nature, the level of profitability of which is not lower than the current value of the CC indicator (capital price for this project). It is with him that the indicator is compared irr, calculated for a specific project, while the relationship between them is as follows:

• if IRR > CC, then the project should be accepted;
• if IRR then the project should be rejected;
• if IRR = SS, the project is neither profitable nor unprofitable.

Another interpretation is to interpret the internal rate of return as a possible discount rate at which the project is still profitable according to the criterion NPV. The decision is made on the basis of comparison IRR with standard profitability; wherein the higher the values ​​of the internal rate of return and the greater the difference between its value and the chosen discount rate, the greater the safety margin of the project. This criterion is the main guideline in making an investment decision by an investor, which does not detract from the role of other criteria. For calculation IRR using discount tables, two values ​​of the discount coefficient are selected so that in the interval () the function changes its value from "+" to "-" or from "-" to "+". The following formula is applied:

(5.2)

where is the value of the discount factor, at which ; – the value of the discount factor, at which .

The accuracy of calculations is inversely proportional to the length of the interval (), and the best approximation is achieved in the case when and are the values ​​of the discount coefficient closest to each other that satisfy the conditions formulated above.

Accurate value calculation IRR only possible with a computer.

Example

It is required to determine the value of the indicator IRR for a three-year project requiring an investment of 2000 den. units and having estimated cash receipts in the amount of 1000, 1500 and 2000 den. units

For calculation IRR using discount tables, we select two arbitrary discount factors, for example, and calculate the value of the function NPV= We get NPV =f(40%) = 207 and NPV = f(50%) = -75. So the function NPV =f(i) changes its value from "+" to "-", and this range of values ​​suits us for the calculation IRR(of course, it is not always possible to choose such an interval right away, sometimes it is necessary to carry out several iterations).

Further, in the same way, we can refine the obtained value IRR through several iterations, having determined the nearest integer values ​​of the discount factor, at which NPV changes sign. For our example, such integer values ​​are .

Thus, the desired value IRR is, according to our calculations, 47.17%. (Meaning irr, obtained using the financial calculator is 47.15%).

The main calculations are presented in table. 5.5.

Table 5.5. Calculations for example

The advantages of this criterion include objectivity, independence from the absolute size of investments, information content. In addition, it can be easily adapted to compare projects with different levels of risk: projects with a high level of risk should have a large internal rate of return. However, it also has disadvantages: the complexity of non-computer calculations, a great dependence on the accuracy of estimating future cash flows, and the impossibility of using it if there are several roots of the equation.

To determine the internal rate of return, as in the method of net present value, it is necessary to have assumptions that largely coincide with each other for both methods. The exception is the assumption regarding the investment of released funds (reinvestment condition), as well as differences in capital costs and operating life. The corresponding assumption of the method of determining the internal rate (investment at the internal interest rate) is generally not appropriate. Therefore, the method of determining the internal rate of return without taking into account specific reserve investments or other modification of conditions should not be used to assess absolute profitability if complex investments are taking place and thereby a reinvestment process occurs. With this type of investment, there is also the problem of the existence of several roots when solving the original equation. In these cases, it may be difficult to interpret the results of the method for determining the internal rate of return.

The method of determining the internal rate of return for assessing relative profitability should not be applied, as noted above, by comparing the internal interest rates of individual objects. Instead, the investment must be analyzed to determine the difference. In the case of investments made in isolation, the internal interest rate can be compared with the calculated one to make comparisons possible. If investments for comparing profitability are complex, then the use of the method of determining profitability is inappropriate.

The advantage of the internal rate of return method over the net present value method is its interpretability. IRR characterizes the accrual of interest on the capital expended (return on capital expended).

In addition, the internal interest rate can be considered as a critical interest rate for determining the absolute profitability of an investment alternative in the event that the net present value method is applied when the assumption of "reliable data" is invalid.

Thus, the evaluation of investments using this method is based on determining the maximum value of the discount rate at which projects will break even.

Criteria NPV, IRR and R/, most commonly used in investment analysis, are in fact different versions of the same concept, and therefore their results are related to each other. Thus, we can expect the following mathematical relationships to be fulfilled for one project:

There are techniques that correct the method IRR for use in a particular non-standard situation. One such method is the modified internal rate of return method. (MIRR).

An investment is a long-term investment of capital in something in order to obtain an effect. This effect can be both social and economic. The economic effect of an investment is called profit.

Interest rates that are necessary to calculate the feasibility of investments

In financial mathematics, there are three types of interest rates that an investor uses when calculating the feasibility of his investments. The first rate is the internal rate of return of the investment project (IRR). This index shows what percentage should be taken when calculating the effectiveness of investments.

The second interest rate is the calculation interest itself. This is the rate that the investor puts into his calculation.

The third indicator is called "internal percentage". It shows how much the investment paid off as a percentage.

The difference between the GNI of an investment project, internal and calculation interest

All of the above indicators may or may not be equal. If you calculate the internal rate of return of an investment project, you can see that these three interest rates do not always have the same value.

The thing is that with the calculation interest, the investor can receive both profit and loss in general and in comparison with the alternative way of using funds. The internal rate of return of an investment project shows the percentage at which the investor receives neither loss nor profit. If the net worth is above zero, this means that the percentage included in the calculation of the effectiveness of the investment is below the rate of return. In the event that the net worth is below zero, the calculated interest exceeds the IRR of the investment project.

In these cases, it is necessary to calculate the internal percentage, which shows how profitable the investment is.

The concept of the rate of return and the method of its determination

The key indicator for determining how effective an investment is is the internal rate of return of an investment project. This means that the amount of income received from investment activities should be equal to the amount of investments. In this case, the flow of payments will be equal to zero.

There are two ways to determine the payback ratio. The first of these is to calculate the internal rate of return of an investment project, provided that the net worth is 0. However, there are cases when this indicator is higher or lower than zero. In this situation, it is necessary to "play" with the calculation percentage, increasing or decreasing its value.

It is necessary to find two calculation rates at which the net present value indicator will have a minimum negative and a minimum positive value. In this case, the payback ratio can be found as the arithmetic mean of two calculated interest rates.

The role of the current value in the calculation of the rate of return

The current value plays a key role in determining the internal rate of return of an investment project. Based on the formula for its determination, the calculation of the internal rate of return of the investment project is also carried out.

With the present value method, it is known that the present value is zero, which means that the invested capital is returned with an increase at the level of the calculation percentage. When determining the internal interest, such an interest rate is determined, using which the present value of a series of payments will be equal to zero. This means at the same time that the current value of receipts coincides with the current value of payments.

When using an alternative calculation percentage, the one that results in a fair value of zero is determined.

Net present value calculation

As already known, the internal rate of return of an investment project is calculated using the net present value formula, which has the following form:

NTS = CF t / (1+VNI) t , where

• CF - (flow of payments the difference between receipts and expenditures);
• IRR - internal rate of return;
• t - period number.

Payback calculation

The formula for the internal rate of return of an investment project is derived from the formula that is used in the process of determining the net present value, and has the following form:

0 \u003d CF / (1 + p) 1 ... + ... CF / (1 + GNI) n, where

• CF - the difference between receipts and payments;
• IRR - internal rate of return;
• n - number of the period of the investment project.

Problems with manual calculation

If the investment project is designed for a period of more than three years, the problem of calculating the internal rate of return using a simple calculator arises, since equations of the fourth degree arise to calculate the coefficient of a four-year project.

There are two ways to get out of this situation. First, you can use a financial calculator. The second way to solve the problem is much easier. It consists in using the Excel program.

The program has a function for calculating the rate of return, which is called IRR. To determine the internal rate of return of investment projects in Excel, you need to select the SD function and place the range of cells with cash flow in the "Value" field.

Graphical calculation method

Investors were calculating internal rate of return long before the first computers were invented. To do this, they used a graphical method.

On the y-axis it is necessary to display the difference between income and expenses for the project, and on the abscissa axis - the calculation percentage of the investment project. The type of charts can be different depending on how the cash flow changes during the investment project. Ultimately, any project will cease to be profitable, and its graph will cross the x-axis, which displays the calculation percentage. The point at which the project schedule crosses the x-axis is the internal rate of return on investment.

An example of calculating the internal rate of return

You can analyze the method for determining the payback ratio of a deposit using the example of a bank deposit. Let's say its size is 6 million rubles. The term of the deposit will be three years.

The capitalization rate is 10 percent, and without capitalization - 9 percent. Since the money earned will be withdrawn once a year, the rate without capitalization, that is, 9 percent, is applied.

Thus, the payment is 6 million rubles, receipts - 6 million * 9% = 540 thousand rubles for the first two years. At the end of the third period, the amount of payments will be 6 million 540 thousand rubles. In this case, the IRR will be equal to 9 percent.

If you use 9% as the calculation percentage, the net present value will be 0.

What affects the rate of return?

The internal rate of return of an investment project depends on the amount of payments and receipts, as well as on the term of the project itself. Net present value and rate of return are interrelated. The higher the coefficient, the lower the NPV value, and vice versa.

However, there may be a situation where the relationship between NPV and the internal rate of return is difficult to follow. This happens when considering several funding alternatives. For example, the first project may be more profitable at one rate of return, while the second project is able to generate more income at a different rate of return.

Domestic percentage

When calculating manually, it is customary to determine the internal percentage by interpolating nearby positive and negative current values. In this case, it is desirable that the calculation percentages used differ by no more than 5%.

Example. What is the internal percentage of a series of payments?

1. We determine the calculation percentages that lead to negative and positive present values. The closer current values ​​are to zero, the more accurate the result.
2. We determine the percentage using an approximate formula (linear interpolation).

The formula for calculating the internal interest is as follows:

Vp \u003d Kpm + Rkp * (ChTSm / Rchts), where

Vp - internal interest;

• Kpm - a smaller calculation percentage;
• Ркп - the difference between the smaller and larger calculation percentages;
• ChTSm - net present value at a lower calculation percentage;
• Rhts - the absolute difference in current values.

According to the table, you can calculate the value of the internal percentage. The discounted cash flow is calculated by multiplying the discount factor by the size of the cash flow. The sum of the discounted cash flows is equal to the net present value. The internal percentage in this example is:

13 + 1 * (207 242 / (207 242 + 69 607)) = 13,75%

Internal Interest Interpretation

A certain internal percentage can be interpreted:

1. If the internal interest is greater than the given calculation interest p, then the investment is evaluated positively.
2. If the internal and calculated interest are equal, then the invested capital is returned with the necessary increase, but no additional profit is created.
3. If the internal interest is lower than p, then there is a loss of interest, because the invested capital would receive more accrual in an alternative use.
4. If the internal interest is below 0, then there is a loss of capital, i.e. the invested capital from the income from the investment is returned only partially. There is no accrual of interest on capital.

The advantage of internal interest is the fact that it does not depend on the investment volume and is therefore suitable for comparing investments with different investment volumes. This is a very big advantage over the present value method.