@@alexblack8780 People who just say such videos are bullshit are people who don't study and expect to find videos that are exactly like their assignment requirements. You did not study
Well obviously because the truth of the matter is that you're not attending IVY LEAGUE schools for their excellence in teaching. You attend for the brand name and networking.
I am a 38 year old who failed maths at school and now I’m training for investment exams. Your videos are helping me greatly. Mathematics really isn’t as intimidating as it seems.
I’m taking a financial statement analysis course, and before watching this video I didn’t understand the point of the IRR. I couldn’t see why you would want to set the NPV = 0. Now that I see that the two functions are different ways of coming up with a decision (one a dollar figure and the other a rate), it makes perfect sense.
I have cracked it by watching this video over and over. Thank you for such awesome content. Thank God ❤️. IRR is the actual rate of return of an investment. IRR can be found when Npv =0. This is because The cash flows which we are going to earn in future, are future cash flows which have to be converted into their present value. This is done for an 🍎 to 🍎 comparison. If Npv>0 it means capital appreciation and Npv
Waaaw, I have looking for explanations about IRR, NPV and it was always confusing. You just enlighten me. This video is 9 years old but a lot more clear than all the one I have checked. Thanks a lot. I hope that you continue to do that.
I like how you explain formulas conceptually like a professor (like how you explained the tax shield in the WACC video). A lot of websites only tell you what the formula is, but don't tell you why.
seriously wow!! one should teach at such a basic level to make people understand. The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project. For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project. Thank you so much!!
You are are really good. You made me understand this concept better than my lecturer. U earned my subscription. I will keep learning from you. Thanks Sir❤
Thank you sir so much! It's my first time to leave a comment, but your lecture is so superb! I hope you're my professor. Best lecture ever! Clear! And perfect thank you so much! You saved me♥♥
Hey! Question to NVP: I really dont understand why We use the profits of our investment instead of the money we invested. Shouldn't we be using the 100 dollars investment, since we would get 108 back if we invested 100 (say we invest in stocks with 8%). How do the opportunity costs have anything to do with the yield our investment generates?
Wilma Agnes Excellent question! When we calculate NPV, we are strictly evaluating a project as if it were a series of cash flows and then discounting those cash flows back to the present time. Cash flow in t=0 is -100 and cash flow in t=1 is 130. We do not have to discount the cash flow in t=0 because it is the present day, but we must discount the cash flow in t=1 by dividing it by one plus the discount rate (in this case, 1+.08). We can view this discount rate as an opportunity cost of capital (the best expected return in the market on an investment of comparable risk and term); thus, receiving $130 cash one year from now is equivalent to receiving $120.37 today (given an 8% return, an initial investment of $120.37 would be worth $130 in one year). Now that we know that the t=1 cash flow we'll be receiving is worth $120.37 in today's dollars (aka the present value), we can combined it with the -100 cash flow in period t=0 (which doesn't need to be discounted because it's happening today) to compute a "net" present value of $20.37. I hope this helps! These concepts can be quite difficult. I hope I didn't make things more confusing :)
Thanks God, you don't know how much you helped me sir, I am preparing for Finance exam and Your video made it very very VERY clear to me. Thank you sir... God Bless you for your good work...
The IRR and NPV equations are identical with the exception that you're solving for a different variable. Therefore, as the rate (call it R or r) goes up, your NPV decreases. When you get to NPV=0, the "R or r" at that point is 30%. Can you please explain, why your rate of return continues to increase if your project's NPV goes negative (implying destruction of firm value)? Conceptually, I can't wrap my brain around this. Thank you for your videos.
likquidsteel Taken from a mathematical angle, the higher the denominator, the IRR in this case, the smaller the result. From a finance angle, notice that this is a discounting rate; not a compounding rate. The NPV is basically the sum of the discounted present values of the cash inflows. You're "stripping" an invested sum of money in the future, at a specific rate, of its interest and sorta bringing it to the now where it hasn't been invested yet. So, the higher the IRR, the more "stripped" the money is; consequently, the smaller the amount now, the NPV. I hope you have a better understanding of it now.
The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project. For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project.
The algebra to obtain R=.30 : Does that mean that : 1) 130/(1+R) to the power of 1 since there is just one period; 2) 100 replace R; 3) so 130/100 - 1 ... 1.30-1=.30.
How do u determine what 2 Discount Factors to use ? I can t really trial and error as there is limited time in my FM exam. I need this to calculate the cost of redeemable debt
@@keepsmiling1603 you consider the opportunity cost of the investment. If you were to keep the money in a saving account, you could earn 12% annual interest for example. You then use 12% as the discount rate.
my question is, how did you find out the IRR was 30%? In this example it is easy because of the numbers, but what if the numbers were more complex and you had several cash flows?
Great video-Thank you. But actually made me a bit more confused. You state IRR is condition which sets the NPV = 0. We know in the case of NPV that an investment should ONLY be made if NPV > 0. So shouldn't the decision rule for IRR be that if the rate of return is GREATER than IRR then an investment should be made?
To understand this more fully you should first understand the relationship between interest rates and present values. As with bond valuation, the higher the discount rate the lower the present value. With NPV this also means the higher the discount rate the lower the NPV. Now with IRR (which in fact is a hypothetical rate to determine break even position, i.e. NPV=0) if it is greater than the discount rate then this would mean the NPV associated with the actual discount rate would be >0, accept. Conversely, if the IRR is less than the discount rate then the NPV associated with the true discount rate will be
superb,... conceptual... 8 percent is bep in this ex ... irr more than bep accept.. thats the conceptual point u made amazingly explained in a conceptual manner...!!great boss !!
Respective rate of returns need to be calculated and the one yielding highest'll be selected.Either way to get an idea as to what project is to selected you can discount those inflows to present value and evaluate accordingly
Hi, it would be useful to explain the 30%... yes 30% is needed to get NVP=0. But that was either trial and error to get it or a calculation that you didn't explain??
Maybe a long shot to get a reply, but I think I'm misunderstanding. If an 8% rate gets you positive NPV, which is good, but your IRR is saying you need a 30% return to get an NPV of 0, how does it work that IRR says you need a 30% return, but NPV says an 8% return also gets you to an "accept" decision rule?
so basically we compare that to borrowing cost, in this case the 8% represents borrowing cost, meaning our the borrowing cost would need to be bigger than 30% for our company to not be able to create value.
Why using a discounting rate? Am i supposed to use the Cost of Capital to make sure that the net present value would be a profit? If i used alternative returns, like bank interest rate, or alternative return, should it be considered as a net present value before deducting dividends?
Good video - question though...I am trying to build a model for a residential property investment where there will be an initial cash outflow and then either a net gain (inflow) OR net loss (outflow) each year. Do the principles remain the same? In other words, period 1 = -130, period 2 = 15, period 3 = -5, etc. with a terminal value for when the property is then resold
Let's say your company has the following decision rule: "we only accept projects with an IRR greater than 15%." In that case, if you calculate the IRR for a project and it is 23%, you would accept the project. Now it's a bit more complicated than that, as it's usually best to do some type of sensitivity analysis, but that's the general idea.
Let me be clear on some terms, the variables and the concepts. Cost of Capital is a variable expressed as a rate correct? So the term WACC is therefore also a rate so that if the IRR is greater than the required rate of return (RRR) then ..accept, correct? if the NPV in your example is equal to zero then the IRR would be solved algebraically via the formula so what exactly is that little 'r'? You said let's say the discount rate is 8% what is it?
I have sat through Harvard MBA lectures that weren't this concise, thorough, and articulate. Thank you for an excellent presentation.
bullshit lol
@@alexblack8780 People who just say such videos are bullshit are people who don't study and expect to find videos that are exactly like their assignment requirements. You did not study
@@ndumisoradebe5256 lol she's lazy
Well obviously because the truth of the matter is that you're not attending IVY LEAGUE schools for their excellence in teaching. You attend for the brand name and networking.
weird flex but ok
in 10 minutes this man happens to explain things better than my professor does in an hour and a half
The way university professors get discredited on RUclips
Man !!! how can i thank you for this ? so many courses and videos, and u make it clear, simple and logic....
Glad you like them!
You'll never know how helpful your teaching service is, for the ones who cannot afford quality education. Thanks for your efforts, love from India 🇮🇳
I am a 38 year old who failed maths at school and now I’m training for investment exams. Your videos are helping me greatly. Mathematics really isn’t as intimidating as it seems.
Happy 40th Bday!
@@JEENAKKA thank you. I passed the exams and it got me a really good job.
@@RaferJeffersonIII thats awesome man, could you throw some light on what type of exams you gave? It will really help me
@@nikhilesh9445 CFA IMC.
@@nikhilesh9445 oh and CII AF4 but I already had a bunch of CII exams
I’m taking a financial statement analysis course, and before watching this video I didn’t understand the point of the IRR. I couldn’t see why you would want to set the NPV = 0. Now that I see that the two functions are different ways of coming up with a decision (one a dollar figure and the other a rate), it makes perfect sense.
I have cracked it by watching this video over and over. Thank you for such awesome content. Thank God ❤️.
IRR is the actual rate of return of an investment. IRR can be found when
Npv =0. This is because The cash flows which we are going to earn in future, are future cash flows which have to be converted into their present value. This is done for an 🍎 to 🍎 comparison.
If Npv>0 it means capital appreciation and Npv
i didnt get anything but looks very interesting
After so many videos and lectures in last 10 years, finally found something relevant. Thanks for the amazing yet simple explanation.
Waaaw, I have looking for explanations about IRR, NPV and it was always confusing. You just enlighten me. This video is 9 years old but a lot more clear than all the one I have checked. Thanks a lot. I hope that you continue to do that.
I wish you were my professor. your explanations are amazing!
I like how you explain formulas conceptually like a professor (like how you explained the tax shield in the WACC video). A lot of websites only tell you what the formula is, but don't tell you why.
This video is a must before reading any text-book this topic.
I appreciate his efforts. This man explains everything in such an easy way and in 10min. Woww
I am currently studying masters in Australia and I must say you are far better then my tutor.
Thank you for uploading ❤
Thank you so much for providing the *conceptual* interpretation of the IRR, in addition to interpreting the decision rule process under this method!
This tutor is amazing. I really find his videos helpful and easy to understand. THANK YOU!
Fuad,
Thanks so much for watching the videos!
I love how u mention what does that mean conceptually. Im here for that. thank you so much
I'm so glad you found that helpful!
I don't like online learning, but I like online learning with you.
Thank you my friend!
Really good explanation and just 7 mins. Loads better than other videos . Thnx a lot :D
Gosh MBA student here, I was drowning but your video helped a lot..God Bless
I'm confused... You get an NPV of $20.37 when r=8%. And an NPV of $0 when R=30%. Why does this mean you accept when R>r? If R
I'm just getting started in investing in multifamily. This video is GREAT!!!
What a lovely insightful view of IRR.
I was getting really frustrated and then I found this video and now I feel intelligent, thank you!!
It's finals week and Edspira is my lord and savior until it's over
Thank you sir! You helped me save so much time with my MBA studies!
+Vivi Lin No problem! I hope you're having a great experience with the MBA!
This was much easier to understand than my professor's explanation. Thank you for your videos, they are lifesavers!!!
You're very welcome!
This guy is a genius, thumps up
what about having project has more than one return how can I calculate internal rate of return to this project?
You'll have to discounts all the returns, find their sum and put it in the NPV formula.
Studying through Unisa and man one is alone. I will be going through all your lessons preparing assignment and exams thank you😊
what about when we have a time of about 5 years how do we solve for R knowing that you add them together increasing the power of 1+i
Thank you so much for posting these videos! You are an incredible instructor. Now I understand my classwork. Great job!
Thanks for making my Financial Mgmt class so much easier!
Works just as he says once I bought the basic casio calculator!!! Thank you
YOU EXPLAIN BETTER THAN MY CORPORATE FINANCE PROFESSOR. MY LORD AND SAVIOR
seriously wow!! one should teach at such a basic level to make people understand. The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project.
For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project.
Thank you so much!!
You are are really good. You made me understand this concept better than my lecturer. U earned my subscription. I will keep learning from you. Thanks Sir❤
Thank you so much for your help. I first struggled with this concept in class. You made learning economics fun and easy!
Thanks Mark Lee! It always good to hear that these videos are helpful :)
0:25 If NPV > 0, Accept, If Not, Don't Accept
1:00 Ex. Project
5:00 If R>r, Accept
Excellent stuff - the algebra makes it so clear
If project I of like 5 years you use the cumulative cash flow or the cash flow of the fifth year?
You are a very good teacher 👏 👏 👏 👏 👏
Thank you sir so much! It's my first time to leave a comment, but your lecture is so superb! I hope you're my professor. Best lecture ever! Clear! And perfect thank you so much! You saved me♥♥
Hey! Question to NVP: I really dont understand why We use the profits of our investment instead of the money we invested.
Shouldn't we be using the 100 dollars investment, since we would get 108 back if we invested 100 (say we invest in stocks with 8%). How do the opportunity costs have anything to do with the yield our investment generates?
Wilma Agnes Or in other words: Why are our opportunity costs 20,37 and not 22 (130-100*1,08). Love your Channel by the way:)
Wilma Agnes Excellent question! When we calculate NPV, we are strictly evaluating a project as if it were a series of cash flows and then discounting those cash flows back to the present time. Cash flow in t=0 is -100 and cash flow in t=1 is 130. We do not have to discount the cash flow in t=0 because it is the present day, but we must discount the cash flow in t=1 by dividing it by one plus the discount rate (in this case, 1+.08). We can view this discount rate as an opportunity cost of capital (the best expected return in the market on an investment of comparable risk and term); thus, receiving $130 cash one year from now is equivalent to receiving $120.37 today (given an 8% return, an initial investment of $120.37 would be worth $130 in one year). Now that we know that the t=1 cash flow we'll be receiving is worth $120.37 in today's dollars (aka the present value), we can combined it with the -100 cash flow in period t=0 (which doesn't need to be discounted because it's happening today) to compute a "net" present value of $20.37. I hope this helps! These concepts can be quite difficult. I hope I didn't make things more confusing :)
Education Unlocked Finally I understand it, thank you so much!!!
Wilma Agnes No problem :) I hope you do great in your course!
Best wishes!!
everything good until 4:23 where that .30 came from?
0 = -100 + 130/(1+R)
100 = 130/(1+R)
100(1+R) = 130
100 + 100R = 130
100R = 130 - 100
100R = 30
R = 30/100
R = .30
Garai Elias why do we have two 100 ?
@@fabinaulaguari2580 a(b+c)=ab+ac
Thanks u have helped me a lot with proper explanation
Thanks God, you don't know how much you helped me sir, I am preparing for Finance exam and Your video made it very very VERY clear to me. Thank you sir... God Bless you for your good work...
Comments like these keep me motivated to keep churning out content. I hope you did well on your exam. Best of luck to you!
Ferris Bueller's teacher came to mind! Good stuff, though, seriously. Thanks!
The IRR and NPV equations are identical with the exception that you're solving for a different variable. Therefore, as the rate (call it R or r) goes up, your NPV decreases. When you get to NPV=0, the "R or r" at that point is 30%. Can you please explain, why your rate of return continues to increase if your project's NPV goes negative (implying destruction of firm value)? Conceptually, I can't wrap my brain around this. Thank you for your videos.
likquidsteel
Taken from a mathematical angle, the higher the denominator, the IRR in this case, the smaller the result.
From a finance angle, notice that this is a discounting rate; not a compounding rate.
The NPV is basically the sum of the discounted present values of the cash inflows. You're "stripping" an invested sum of money in the future, at a specific rate, of its interest and sorta bringing it to the now where it hasn't been invested yet. So, the higher the IRR, the more "stripped" the money is; consequently, the smaller the amount now, the NPV.
I hope you have a better understanding of it now.
The concept is if market discount rate (r) is greater than IRR (R), then NPV become negative. The inference is, if your market rate is high, you can go and invest the money in the market than investing in the project.
For example, from the above sum, lets say discount rate (r) is 35%. Discount rate also means the market rate. So one can go and invest 100$ and make 135$ in a year. But this project only gives 130$. So if Rr, invest in the project.
@@venkatachalamv3826 Yes! This is what should have been explained in the video.
@@adityaprasad465 Thank you!! :)
The algebra to obtain R=.30 : Does that mean that :
1) 130/(1+R) to the power of 1 since there is just one period;
2) 100 replace R;
3) so 130/100 - 1 ... 1.30-1=.30.
Thank you so much. My brain was collapsed to figure out this algebra. Regret to not paid attention at school. Hahah
Your videos are a lifesaver, especially for a beginner - Keep up the good work!
Your way of explaining is soo simple, yet elaborate. Love it
How do u determine what 2 Discount Factors to use ? I can t really trial and error as there is limited time in my FM exam. I need this to calculate the cost of redeemable debt
Yes, same question that becomes very difficult
You consider the opportunity cost: if you were to invest the $100 in a savings account for example, how much % interest would you earn?
@@keepsmiling1603 you consider the opportunity cost of the investment. If you were to keep the money in a saving account, you could earn 12% annual interest for example. You then use 12% as the discount rate.
@@igitego thank u sir
@@keepsmiling1603 you are welcome
my question is, how did you find out the IRR was 30%? In this example it is easy because of the numbers, but what if the numbers were more complex and you had several cash flows?
MerchMaster You can either use numerical interpolation through trial and error or just plug in the cash flow equation into a calculator.
Calculate it using algebra method
Very Clear. Helpful for the exam. Thanks
No problem-- hope you did well on the exam!
Great video-Thank you. But actually made me a bit more confused. You state IRR is condition which sets the NPV = 0. We know in the case of NPV that an investment should ONLY be made if NPV > 0. So shouldn't the decision rule for IRR be that if the rate of return is GREATER than IRR then an investment should be made?
To understand this more fully you should first understand the relationship between interest rates and present values. As with bond valuation, the higher the discount rate the lower the present value. With NPV this also means the higher the discount rate the lower the NPV. Now with IRR (which in fact is a hypothetical rate to determine break even position, i.e. NPV=0) if it is greater than the discount rate then this would mean the NPV associated with the actual discount rate would be >0, accept. Conversely, if the IRR is less than the discount rate then the NPV associated with the true discount rate will be
@@venusfrith2864 so well explained. Thank you mate!
superb,... conceptual... 8 percent is bep in this ex ... irr more than bep accept..
thats the conceptual point u made amazingly explained in a conceptual manner...!!great boss
!!
Thanks for the kind words!
thank you so much!!!!!...all the way from South Africa
which course are doing
Anele Goniwe Business Management (ICB)
Another South African 😀
Luqmaan Abrahams hey!, goodluck with your exams ✌
Thank you so much for sharing your wealth of knowledge.
Sure, I'm happy to help!
Brillant! I wish I could meet you one day. Saving us since years ♥️
Thank you, what if we have multiple cash inflows? do we need to find big Rs of each cash inflow? could u pls clarify? thank you!!
Respective rate of returns need to be calculated and the one yielding highest'll be selected.Either way to get an idea as to what project is to selected you can discount those inflows to present value and evaluate accordingly
Hi, it would be useful to explain the 30%... yes 30% is needed to get NVP=0. But that was either trial and error to get it or a calculation that you didn't explain??
Thank you, your videos are extremely helpful! Your voice is also very pleasant and easy to listen to. ☺😉
Thank you!
you earned a sub you legend
I use Delta Business Financial calculator , android but I didn't know what things are meaning .
now I got it thank you for your tutorial
thanking you before i finish watching the video bc it helped so much I'm crying
Thank you for this kind note. I hope you do great in your course!
Great explanation 💯💯
Awesome and clear thanks !
My pleasure! Best wishes
Education Unlocked
Love your explanation is very clear
thank you so much it was so clear, but how can i know what discount rate to choose, like here you applied 30% R , what was the reason of applying 30%
finally the explanation that i need. thankyou sir!
great tutorial
Thanks!
Maybe a long shot to get a reply, but I think I'm misunderstanding. If an 8% rate gets you positive NPV, which is good, but your IRR is saying you need a 30% return to get an NPV of 0, how does it work that IRR says you need a 30% return, but NPV says an 8% return also gets you to an "accept" decision rule?
so basically we compare that to borrowing cost, in this case the 8% represents borrowing cost, meaning our the borrowing cost would need to be bigger than 30% for our company to not be able to create value.
Nice and clear, much appreciated.
Thanks a lot, sir! You made my college life easier.
You made me smile with this comment :) Happy studies!
great,thanx a lot ,sooo useful, I have learned it before and totally forgot about it, and the videos help me remand of all the knowledges.
Awesome. Thanks for watching!
You are exceptionally good. Thanks Sir.
Really helpful but still don't get how you calculated that the big R = 30% - please can someone help?
same
would the discount rate be similar or equal to a given MARR in a problem?
my mba proffessor sucks, this was helpful
After today I know what IRR is thank you. for the video
Why using a discounting rate? Am i supposed to use the Cost of Capital to make sure that the net present value would be a profit?
If i used alternative returns, like bank interest rate, or alternative return, should it be considered as a net present value before deducting dividends?
We can also use table of pvif or pvifa
to calculate the npv right? But what if the answer is different ? (Compared to manual in this video)
Good video - question though...I am trying to build a model for a residential property investment where there will be an initial cash outflow and then either a net gain (inflow) OR net loss (outflow) each year. Do the principles remain the same? In other words, period 1 = -130, period 2 = 15, period 3 = -5, etc. with a terminal value for when the property is then resold
Thank you professor 🙏
It's Cristal clear now on IRR concept!
But I didn't understand how it should be a part of investment decision?
Let's say your company has the following decision rule: "we only accept projects with an IRR greater than 15%." In that case, if you calculate the IRR for a project and it is 23%, you would accept the project. Now it's a bit more complicated than that, as it's usually best to do some type of sensitivity analysis, but that's the general idea.
Greatly explained, thank youuu.
Thank you so much! but what if R=r? In this case do we accept or reject?
Great question. In that case, the general consensus is to accept the project.
WOW you are the best!! Literally my life saver!
Let me be clear on some terms, the variables and the concepts. Cost of Capital is a variable expressed as a rate correct? So the term WACC is therefore also a rate so that if the IRR is greater than the required rate of return (RRR) then ..accept, correct? if the NPV in your example is equal to zero then the IRR would be solved algebraically via the formula so what exactly is that little 'r'? You said let's say the discount rate is 8% what is it?
What if there's more than 1 year? Do you just add it to the equation?
how can you be sure that rate is 30% *big R* ?can i take 20% too or can take any percentage rate?
How did you decide on 30%?
Very good video! Thank you!
Thank you very much
But how do you do it involving multiple cash flows
a really perfect explaination. thank you
Anyone knows what tool was used here to record this video with that feature to somehow write on the black board?
This is really really good! Thank you very much helping me out!
You're welcome. Good luck to you!
This is really helpful video.
Hi Coach, just wandering, why are we using discount rate instead of interest ?