WACC vs IRR

Are the Weighted Average Cost of Capital and the Internal Rate of Return the same thing? Well, they are related, but not the same. Let me show you how that works, in words, in formulas, and in numbers. I assume you already know the basics of how Net Present Value works. If you don’t, then please watch the video "NPV and IRR explained" first:    • NPV and IRR explained  

⏱️TIMESTAMPS⏱️
0:00 Introduction
0:22 WACC and IRR definitions
0:56 WACC in NPV calculations
1:29 IRR in NPV calculations
1:46 NPV formula
2:05 WACC in NPV formula
2:22 IRR in NPV formula
2:43 NPV IRR WACC example
4:33 How to calculate IRR

The Weighted Average Cost of Capital is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. The riskier or more uncertain the company and the riskier or more uncertain the project, the higher the WACC. Internal Rate of Return is the discount rate at which the net present value of all cash flows from a particular project is equal to 0.

Here are the steps to use in the NPV formula when you use Weighted Average Cost of Capital. Step 1: start with the nominal cash flows. Step 2: apply the WACC as an input variable. Step 3: Calculate NPV.

Here are the steps to use in the NPV formula when you use Internal Rate of Return. Step 1: start with the nominal cash flows. Step 2: set NPV to zero. Step 3: Calculate IRR as the output variable.

Philip de Vroe (The Finance Storyteller) aims to make strategy, #finance and leadership enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!