Internal Rate of Return in Finance.
Python programming language and its libraries combined together form a powerful tool for solving Regression analysis tasks.
The IRR is a useful metric in financial analysis to evaluate the profitability of potential investments. It is actuallt a discount rate that makes the net present value (NPV) of all cash flows equal to zero.
Simple Decision Rule:
• Accept the Project if IRR > Required Rate of Return
• Reject the Project if IRR < Required Rate of Return
Interpretation of IRR:
• (Hypothetical) Rate of Return where NPV = 0
• Leads to exactly the same decisions as NPV Decision Rule
Internal Rate of Return (IRR):
Where:
NPV: Net Present Value
Io: Initial Investment (negative)
CFt: cashflow @ timestamp t
N: Total number of periods
IRR: Internal Rate of Return (NPV = 0)
t = timestamp (0, 1, …, N)
cf = [-200, 20, 50, 70, 100, 50]
guess = 0.06
step = 0.0000001
target_npv = 0
tolerance = 0.001
while True:
f = 1 + guess
NPV = 0
for i in range(len(cf)):
NPV += cf[i] / f**(i)
#print(NPV, guess)
diff = NPV - target_npv
if abs(diff) > tolerance:
if diff < 0:
guess -= step
elif diff > 0:
guess += step
else:
break
print(NPV, guess)
You can also calculate IRR using NUMPY library which is much more simple way to do it.
import numpy as np
import numpy_financial as npf
cf = [-200, 20, 50, 70, 100, 50]
npf.irr(cf)
Payback Period in Finance.
Below is an example of calculating projects Payback Period - Time until initial Investment is recovered.
cf = [-200, -150, 50, 70, 100, 50]
cum_cf = 0
for i in range(len(cf)):
cum_cf += cf[i]
#print(cum_cf)
if cum_cf > 0:
print("The Project´s Payback Period is {} Years!".format(i) )
break
elif cum_cf <= 0 and i == len(cf)-1:
print("The Project does not break even!")