How to calculate the rate of profitability

Profitability rate is an economic indicator of profits from investment. In simple language, this interest rate, in which the net current value of investment is zero (invested its money, you will not lose anything, but do not get), i.e. Profit will be only if the real percentage is higher than the rate of profitability.

Calculate the rate of profitability (internal rate of profitability) IRR can be calculated using the equation: CFM / (1 + IRR) ^ m \u003d i, where m is the period, CFM - cash flow during this period, I is the value of investments.

The estimated rate of profitability is allowed to estimate the feasibility of a particular business solution. For example, if a single source of income in the form of a loan is specified, Calcuting IRR, you will see the border value of the annual loan rate, above which it makes no sense, since the project will then be unprofitable.

In addition, the rate of profitability is one of the reference indicators, on the basis of which the decision on the admissibility of the project as a whole is made. If the value calculated by the formula exceeds investment capital, the project has a future and a business idea is considered profitable. Otherwise, the project is rejected, since the cost of the project will not pay off and, even more so, will not bring any profits. This is a kind of security threshold for business.

The rate of return ratio allows you to compare and evaluate the profitability of projects that differ in durability and scales. Percentages of profitability - the value is relative, so they are so easy to interpret about the situation.

Do not forget that as any other, the rate of profitability is theoretical. In practice, it is practically impossible to achieve the calculated indicator: the real economic situation contributes its own adjustments. In addition, when calculating, keep in mind that this indicator is sensitive to the flow structure structure, which is sometimes impossible to evaluate mutually exclusive business projects. When alternating cash tributaries and outlines it is possible that the values \u200b\u200bof the profitability rate will be several.