IFRS List.com: Internal Rate of Return (IRR)

The Community about IAS/IFRS, International Accounting

Home » OTHER

Internal Rate of Return (IRR)

28 August 2008 1,278 views No Comment

For Example:

A ) In Jan-2008 We have Invested 100,000,000 $ for that 50% (50,000,000) we took a loan from financial institution and 50% (50,000,000) we invest from our capital.

B) Rate of interest for borrowing (50,000,000) is 8% flat yearly.

C) We need to pay extra (cost) of $ 1,000,000 for incurring cost monthly.

C) We sold out this investment in 120,000,000. in June-2008.

Can anybody guide me to calculate IRR (Internal Rate of Interest).

Also convey with if you have any easy example/function/theory.

Best Regards,

Zakariyya

Dear Zakariyya,

Between January 2008 and June 2008 you registered some cash from your investment?

Or you invested only for speculative matter?

Best regards,

Marian

Zakariyya,

You need to focus on the cash flow items:

The cash flow items are (in chronological order):

- The investment out of pocket (50 MM). (The other 50 MM you receive from the bank and you pay for the invesment so it is 0 at the beginning)
- the interest that you pay monthly (8% divided by 12 months applied to 50 MM = 333.333 per month)
- the 1 MM that you pay (I am assuming at the end)
- the payback of the loan (50 MM) at the end
- the income received (120 MM) at the end

If you put those in order you have:
Month 1: – 50.000.000
Month 2: – 333.333
Month 3: – 333.333
…
Month 6: – 333.333
End: +69.000.000 (-1.000.000 – 50.000.000 +120.000.000)

if you put them in the same column in Excel you will use the IRR Function and get 5.02% per month IRR. If you want to compare that with the rate of interest you need to multiply by 12 so you get aprox 60%

You need to be careful of the timeline (if interest is paid at the beginning or at the end of the period etc)

You can check if IRR is correct by computing the NPV of the project if interest rate is IRR. It should be nil

Regards,
Stelian

only for speculative matter

Hi,

I am sorry there was a little computational mistake in the previous mail. Please accept the correction:

Date	Cash flow	Loan
01/01/2008	-£ 100,000,000.00	Amount borrowed	£50,000,000.00
30/01/2008	-£ 1,333,333.33	Annual flat interest rate	8%
28/02/2008	-£ 1,333,333.33	If borrowed for one year:
30/03/2008	-£ 1,333,333.33	Monthly interest payment	£333,333.33
30/04/2008	-£ 1,333,333.00
30/05/2008	-£ 1,333,333.33
30/06/2008	-£ 1,333,333.33
30/06/2008	£ 120,000,000.00	Additional monthly costs of £1.000.000 incurred every month before the sale?
30/07/2008	-£ 333,333.33	If so, then the table in the left illustrates the cash flows incurred in the project
30/08/2008	-£ 333,333.33
30/09/2008	-£ 333,333.33
30/10/2008	-£ 333,333.33
30/11/2008	-£ 333,333.33
30/12/2008	-£ 333,333.33

Simplified approach- if your cash flows incurred at the beginning and end of the year
Date	Cash flow
01/01/2008	-£ 100,000,000.00	-initial investment + monthly interest repayment
01/01/2009	£ 110,000,000.00	-how much you would have received if you sold your
		investment in 1 year and deducted all expenses+interest repayment
IRR where is a rate where NPV is zero-
rate		10.0000000%
NPV		£0
IRR		10.0000000%

Another approach, takes on account the time when the cash flows incurred
IRR where NPV is Zero:
rate		20.7066696882%
XNPV		0
XIRR		20.7066696882%

Few words about NPV and IRR. IRR is a rate where the project’s NPV is zero. This is the rate the project actually returns. NPV rate-is an organisation’s cost of capital. The conception is- a 1£ today is not the same in the future. If your organisation’s cost of capital is 15% then future value of 1£ is 1/(1+0.15)^number of time periods. All cash flows should be multiplied by this 1/(1+r)^n -the discount factor to derive their present values. For example: