Example - Return on Investment (ROI)

Example - Return on Investment (ROI)

Background     There are many ways to evaluate the performance of an investment. The most common is the Internal Rate of Return (IRR) calculation. The IRR is the annualized yield calculated from a series of cash flows. The TValue IRR is represented by the calculated Nominal Annual Rate (NAR).

Facts     Alexander Oil is planning on building a new derrick in the Alaskan Wilderness at a total cost of $30,000,000.00. This amount must be paid by January 2, 2025. The estimated yearly cash flows from the oil obtained are $4,500,000 per year for the first ten years, $3,000,000 per year for the second ten years, and $2,000,000 per year for the third ten years. They plan on selling the project for $10,000,000 on January 2, 2056.

Needed     The IRR on the estimated cash flows.

Settings     This example assumes Normal amortization (Compute Method) and a Year Length of 365 days (set in the Calculations group on the Configuration ribbon).

  1. Enter the cash flow information as shown below. 

    ** SCREEN SHOT HERE **

  2. Press [F9], [Ctrl]+[U], or click Calculate from the Compute group to compute the NAR.

Solution     The Nominal Annual Rate displays the IRR of 13.208%.

What If?     What would the final selling price have to be for a 13.3% return?

  1. Change the NAR to 13.3%.
  2. Type [U] for the final Return Amount on line 5.
  3. Press [F9], [Ctrl]+[U], or click Calculate from the Compute group.

Solution     To get a 13.3% return, Alexander Oil would need to negotiate a final selling price for the project of $17,983,269.04.