Taxes affect a net present calculation in two ways: first, they affect periodic operating cash flows; second, they affect the final salvage value of the project because any gain or loss on sale carries tax implications. …

The depreciation taken on the asset in future periods is not a cash flow and is not included in the NPV and IRR calculations. However, there is a cash benefit related to depreciation (often called a depreciation tax shield) since income taxes paid are reduced as a result of recording depreciation expense.

The major factors affecting present value are the timing of the expenditure (receipt) and the discount (interest) rate. The higher the discount rate, the lower the present value of an expenditure at a specified time in the future.

In addition to the portion of the metric that reflects momentum in the markets or the strength of the economy, other factors—including a project’s strategic positioning, its business performance, and its level of debt and leverage—also contribute to its IRR.

The internal rate of return (IRR) is the annual rate of growth that an investment is expected to generate. IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.

ROI indicates total growth, start to finish, of an investment, while IRR identifies the annual growth rate. While the two numbers will be roughly the same over the course of one year, they will not be the same for longer periods.

Calculating IRR with a Financial Calculator Example

1. Step 1: Press the Cash Flow (CF) Button. This starts the Cash Flow Register when you enter your initial investment.
2. Step 2: Press the Down Arrow Once. The calculator should show CF1.
3. Step 3: Press the Down Arrow Twice.
4. Step 4: Repeat.
5. Step 5: Press the IRR Key.

Write out the formula for interest, F = P(1 + i)^n. F is the final amount. P is your initial (or principle) investment. i is the interest rate (should be written in decimal form).

Investment problems usually involve simple annual interest (as opposed to compounded interest), using the interest formula I = Prt, where I stands for the interest on the original investment, P stands for the amount of the original investment (called the “principal”), r is the interest rate (expressed in decimal form).

Initial investment is the amount required to start a business or a project. It is also called initial investment outlay or simply initial outlay. It equals capital expenditures plus working capital requirement plus after-tax proceeds from assets disposed off or available for use elsewhere.

The initial investment outlay represents the total cash outflow that occurs at the inception (time 0) of the project. The present value of net cash flows is determined at a discount rate which is reflective of the project risk.

To estimate property values based on rental income, investors can use the gross rental multiplier (GRM), which measures the property’s value relative to its rental income. To calculate, divide the property price by the annual rental income.