What does IRR mean in simple terms?
IRR stands for Internal Rate of Return. The same is calculated based on the cash flows.
For eg. if you take a Rs. 10000/- loan and pay monthly instalment of Rs. 361.11 per month for 36 months, you will end up paying Rs. 13,000 for a loan of Rs. 10000 over 3 years. Meaning 30% interest for 3 years or 10% interest per annum.
However, this calculation is not correct as the loan amount gets reduced every month as you pay part of the principal along with each instalment. In order to identify the interest rate that you actually pay, IRR is used. This calculation considers only the outstanding principal on payment of each instalment.
IRR can be calculated using excel by a simple formula. A standard IRR function is available in the formulas wherein you give the range of cash flows as well as an assumption number. This calculates annual IRR. However, if your cashflows are monthly, then you need to multiply the resultant by 12.
Do test it out and you will know the difference in the rates. In the given example, while the simple interest is 10% the IRR comes to 17.92%
Rama Krishna Immadi
ITC Limited-ABD-ILTD
PB No:317
GT Road
Guntur
Andhra Pradesh
India
PIN:522004
IRR stands for Internal Rate of Return. The same is calculated based on the cash flows.
For eg. if you take a Rs. 10000/- loan and pay monthly instalment of Rs. 361.11 per month for 36 months, you will end up paying Rs. 13,000 for a loan of Rs. 10000 over 3 years. Meaning 30% interest for 3 years or 10% interest per annum.
However, this calculation is not correct as the loan amount gets reduced every month as you pay part of the principal along with each instalment. In order to identify the interest rate that you actually pay, IRR is used. This calculation considers only the outstanding principal on payment of each instalment.
IRR can be calculated using excel by a simple formula. A standard IRR function is available in the formulas wherein you give the range of cash flows as well as an assumption number. This calculates annual IRR. However, if your cashflows are monthly, then you need to multiply the resultant by 12.
Do test it out and you will know the difference in the rates. In the given example, while the simple interest is 10% the IRR comes to 17.92%
Rama Krishna Immadi
ITC Limited-ABD-ILTD
PB No:317
GT Road
Guntur
Andhra Pradesh
India
PIN:522004
No comments:
Post a Comment