Investment Terms

Glossary of Terms used in Quake Capital Communications

AR - Annual Revenue ("sales")

MR - Monthly Revenue

MRR - Monthly Recurring Revenue

AUV - Autonomous Underwater Vehicles ("Unmanned Submarines") that can inspect underwater objects (such as underwater bridge pilons supporting a bridge above water

EOY - End Of Year

LOI - Letter Of Intent that formalizes the completion of negotiations of a deal being made

HR - Human Resources; a department within a company training talent; in charge of recruiting new talent

LTV - Long-Term Value

QoQ - Quarter-Over-Quarter comparisons of revenues or expenses

B2B - A marketing channel expressing business-to-business marketing

LPs - Limited Partners, usually referring to those who invested in Quake Capital funds

IoT - The "Internet of Things"; sensors that use internet applications to control, monitor, etc. devices connect to the internet and controlled by a specific coded device

Accelerator Fund - A specialized venture capital fund that takes new business ventures and tries to nurture, teach, train, and motivate the principles to accelerate the founders learning and success trajectories

Measurements:
K or K - thousands
M or MM - millions
B - billions

ROI - Return On Investment
Example:
- If an investment of $100 returned $50 in exactly one year, we would state that the Return On Investment was 50%.
- If the investment returned $50 after two years, the Return On Investment would also be 50%.

IRR - Internal Rate of Return
Example:
- If an investment of $100 return $50 in exactly one year, we would state that the Internal Rate of Return was 50% for that year.
- If the investment return $50 after two years, the Internal Rate of Return would be 23% per year. 23% per year on average for two years would be a 50% increase over two years (due to compounding).
- If the investment return $50 after five years, the Internal Rate of Return would be 8.44% per year.

From Wikipedia:

Internal Rate of Return - IRR

What is 'Internal Rate of Return - IRR'?

Internal rate of return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

The following is the formula for calculating NPV:

Where:

Ct = net cash inflow during the period t
Co = total initial investment costs
r = discount rate (or interest rate)
t = number of time periods 

To calculate IRR using the formula, one would set NPV equal to zero and solve for the discount rate(r), which is the IRR. Because of the nature of the formula, however, IRR cannot be calculated analytically and must instead be calculated either through trial-and-error or using software programmed to calculate IRR.

Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively even basis. Assuming the costs of investment are equal among the various projects,the project with the highest IRR would probably be considered the best and beundertaken first.

IRR is sometimes referred to as "economic rate of return" or "discounted cash flow rate of return." The use of "internal" refers to the omission of external factors, such as the cost of capital or inflation, from the calculation.

  1. IRR
  2. MODIFIED INTERNAL RATE OF RETURN
  3. PROFITABILITY INDEX RULE
  4. ANNUITY METHOD OF DEPRECIATION

BREAKING DOWN 'Internal Rate of Return - IRR'

You can think of internal rate of return as the rate of growth a project is expected to generate. While the actual rate of return that a given project ends up generating will often differ from its estimated IRR, a project with a substantially higher IRR value than other available options would still provide a much better chance of strong growth. One popular use of IRR is comparing the profitability of establishing new operations with that of expanding existing ones. For example, an energy company may use IRR in deciding whether to open a new power plant or to renovate and expand a previously existing one. While both projects are likely to add value to the company, it is likely that one will be the more logical decision as prescribed by IRR.

Internal Rate of Return in Practice

In theory, any project with an IRR greater than its cost of capital is a profitable one, and thus it is in a company’s interest to undertake such projects. In planning investment projects, firms will often establish a required rate of return (RRR) to determine the minimum acceptable return percentage that the investment in question must earn in order to be worthwhile. Any project with an IRR that exceeds the RRR will likely be deemed a profitable one, although companies will not necessarily pursue a project on this basis alone. Rather, they will likely pursue projects with the highest difference between IRR and RRR, as these likely will be the most profitable.

IRR can also be compared against prevailing rates of return in the securities market. If a firm can't find any projects with IRR greater than the returns that can be generated in the financial markets, it may simply choose to invest its retained earnings into the market.

Although IRR is an appealing metric to many, it should always be used in conjunction with NPV for a clearer picture of the value represented by a potential project a firm may undertake.

Read more: Internal Rate Of Return (IRR) Definition | Investopedia
Follow us: Investopedia on Facebook  

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form