Analyzing the sensitivity of internal rate of return to the variable determination of initial investments in the life cycle to calculate the net present value of an investment project

Abstract

Subject. The article analyzes the sensitivity of internal rate of return (IRR) to the determination of initial investments at the main stages of life cycle of an investment project in the form of capital investments. Objectives. The aim is to analyze the sensitivity of IRR to a variable estimate of the initial investment volume determined in the basic, optimistic and pessimistic scenario of implementation, in the context of investment project life cycle in the form of capital investments. Methods. The study employs generally recognized scientific methods of information analysis and synthesis. Results. I reviewed recent publications on sensitivity analysis of dynamic indicators of investment efficiency by foreign and domestic researches, including the IRR, briefly considered international and domestic modern and classic regulatory techniques of sensitivity analysis of IRR for an investment project, performed the sensitivity analysis of IRR at the main stages of investment project life cycle, on the case of a successfully implemented project, in the five-year useful life planning horizon, in three scenarios of investment project implementation (basic, optimistic, and pessimistic). The findings can be used in the comprehensive assessment of return on investment, including at early stages of investment project life cycle, when a fundamental decision is made on the start of the project, and required investment performance indicators are established, including IRR for investment project. Conclusions. In the sensitivity analysis of IRR for an investment project, I determined the influence of variable assessment of initial investments on the dynamic performance indicator under study.