
The fundamental calculation of interest
On the previous page I have tried to explain how the net present value (NPV) of a sequence of payments is
calculated from a comparison net yield and the dates of the payments.
To compute the yield of a security we have to do many calculations of the net present value. We thereby have to find
that comparison yield where the NPV of the security is zero. This is the net yield of the security.
The formula of the net present value was:
N
NBW(B, t, r) = Sum B[i]/(1+r)^t[i]
i=0
The NPV should become zero. Unfortunately one cannot solve and compute this equation easily after r. One must
start with a value of r and change it in such a way, that the NPV approaches zero. Repeating a calculation many
times to find a maximum or minimum is called iteration or a iterative procedure. With this procedure one can
receive the net yield from payment sequences that follows no rules. The net yield is a very good measure for the
success of investments. Naturally, this method has also its limitations.
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Encyclopedia
Analysis  Internal Rate of Return (IRR)
Internal rate of return (IRR)
Return on Investment (ROI)
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investfaq.com
Theory site with articles from many contributors, which are specialists in the different topics.
Modified Internal Rate Of Return  MIRR
The MIRR more accurately reflects the profitability of a project.
Economics Interactive Tutorial
Perils of the Internal Rate of Return.
Internal rate of return: A cautionary tale
Article about the limitations of the IRRmethod.

