INTERNAL RATE OF RETURN

Year CashFlow
0 -800
1 200
2 250
3 300
4 350
5 400

Internal rate of Return 22%

Using the IRR in Loan Table

Cash Flow at
Investment at the End of the
Year Beginning of the year year Income Return of Principle
1 800.00 200.00 177.28 22.72
2 777.28 250.00 172.25 77.75
3 699.53 300.00 155.02 144.98
4 554.55 350.00 122.89 227.11
5 327.44 400.00 72.56 327.44
6 0.00
 USING LOAN TABLE TO FIND IRR

IRR? 15.00%

Cash Flow
Investment at at the End
Year Beginning of the year of the year Income Principle
1 1000.00 300.00 150.00 150.00
2 850.00 200.00 127.50 72.50
3 777.50 150.00 116.63 33.38
4 744.13 600.00 111.62 488.38
5 255.74 900.00 38.36 861.64
6 -605.89

DIRECT CALCULATION OF IRR

Year Cash Flow
0 -1000
1 300
2 200
3 150
4 600
5 900
IRR 24%
 USING GOAL SEEK
IRR? 24.44%

Investment
at
Beginning Cash Flow at the
Year of the year End of the year Income Principle
1 1000.00 300.00 244.36 55.64
2 944.36 200.00 230.76 -30.76
3 975.13 150.00 238.28 -88.28
4 1063.41 600.00 259.86 340.14
5 723.26 900.00 176.74 723.26
6 0.00

OF IRR
USING EXCEL'S RATE FUNCTION TO COMPUTE THE
IRR
Excel’s Rate function computes the IRR
Initial Investment 1000
Periodic Cash Flow 100
Number Of Payments 30
IRR 9.307%
n computes the IRR of a series of constant future payments.
MULTIPLE INTERNAL RATES OF RETURN
Discount Rate 6%
NPV -3.99 DATA TABLE
Discount RateNPV 12
Year Cash Flow -3.99
0 -145 0% 10
1 100 3%
8
2 100 6%
3 100 9% 6
4 100 12%
5 -275 15% 4
18%
21% 2

24%
0
27% 0% 5% 10% 1
30%
33%
36%
39%
42%
45%
48%
Identifying two IRRs
First IRR ###
Second IRR ###
 Two IRRs
12

10

0
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
 FLAT PAYMENT SCHEDULE
Loan Principle 10000
Interest Rate 7%
Loan Term 6
Annual Payment 2097.96

Principal at
the Beginning Payment at the End Return of
Year of the Year of Year Interest Principal
1 10000 2097.96 700 1397.96
2 8602.04 2097.96 602.1429 1495.82
3 7106.23 2097.96 497.4359 1600.52
4 5505.70 2097.96 385.3993 1712.56
5 3793.15 2097.96 265.5202 1832.44
6 1960.71 2097.96 137.2496 1960.71
7 0.00
 SIMPLE FUTURE VALUE
Interest 10%

Account
Balance, Total in
Beginning of the Interest Earned During Account,
Year Year the Year end year
1 1000.00 100.00 1100.00
2 1100.00 110.00 1210.00
3 1210.00 121.00 1331.00
4 1331.00 133.10 1464.10
5 1464.10 146.41 1610.51
6 1610.51 161.05 1771.56
7 1771.56 177.16 1948.72
8 1948.72 194.87 2143.59
9 2143.59 214.36 2357.95
10 2357.95 235.79 2593.74
11 2593.74

A Simpler Way 2593.74 <FV=Initial Amount*(1+i)^n

 FUTURE VALUE WITH ANNUAL DEPOSITS
Interest 10%
Annual Deposits 1000
No. of Deposits 10

Account Deposit Interest

Balance, at the Earned Total in
Beginning Beginnin During Account,
Year of the Year g of Year the Year end year
1 0.00 1000.00 100.00 1100.00
2 1100.00 1000.00 210.00 2310.00
3 2310.00 1000.00 331.00 3641.00
4 3641.00 1000.00 464.10 5105.10
5 5105.10 1000.00 610.51 6715.61
6 6715.61 1000.00 771.56 8487.17
7 8487.17 1000.00 948.72 10435.89
8 10435.89 1000.00 1143.59 12579.48
9 12579.48 1000.00 1357.95 14937.42
10 14937.42 1000.00 1593.74 17531.17

FUTURE VALUE 17531.17

AL DEPOSITS
 RETIREMENT PROBLEM
Interest 8%
Annual Deposit 48000
Annual retirement Withdrawl 30000

Account Deposit at Interest

Balance, the Earned
Beginning of Beginning of During the
Year the Year Year Year Total in Account, end year
1 0.00 48000.00 3840.00 51840.00
2 51840.00 48000.00 7987.20 107827.20
3 107827.20 48000.00 12466.18 168293.38
4 168293.38 48000.00 17303.47 233596.85
5 233596.85 48000.00 22527.75 304124.59
6 304124.59 -30000.00 21929.97 296054.56
7 296054.56 -30000.00 21284.36 287338.93
8 287338.93 -30000.00 20587.11 277926.04
9 277926.04 -30000.00 19834.08 267760.12
10 267760.12 -30000.00 19020.81 256780.93
11 256780.93 -30000.00 18142.47 244923.41
12 244923.41 -30000.00 17193.87 232117.28
13 232117.28 -30000.00 16169.38 218286.66

RETIRE

Solutio

Interest
Annual Deposit
Annual Retirement Withdrawl

Numerator

Denominator
Annual Deposit
 WITH SOLVER FUNCTION
Interest 8%
Annual Deposit 29386.5510008406
Annual retirement Withdrawl 30000

Account Balance,
Beginning of the
Year Year
1 0.00
2 31737.48
3 66013.95
4 103032.54
5 143012.62
6 186191.10
7 168686.39
8 149781.30
9 129363.81
10 107312.91
11 83497.94
12 57777.78
13 30000.00

RETIREMENT PROBLEM

Solution Using Formulas

8%
48000
30000

<=1/(1+i)^n*PV(rate,no. of
126718.535 Deposits,Annual Retirement
Withdrawl)
4.312 <=PV
29386.551 <=Numerator/Denominator
OLVER FUNCTION

Deposit at Interest
the Earned
Beginning During Total in Account,
of Year the Year end year
29386.55 2350.92 31737.48
29386.55 4889.92 66013.95
29386.55 7632.04 103032.54
29386.55 10593.53 143012.62
29386.55 13791.93 186191.10
-30000.00 12495.29 168686.39
-30000.00 11094.91 149781.30
-30000.00 9582.50 129363.81
-30000.00 7949.10 107312.91
-30000.00 6185.03 83497.94
-30000.00 4279.84 57777.78
-30000.00 2222.22 30000.00
-30000.00 0.00 0.00
 MULTIPLE COMPOUNDING PERIODS
Initial Deposit 1000
Interest rate 5%
Number of Compoundings per Year 2
Interest per Compounding Period 2.500%
Accretion inOne Year 1050.625 <= ID*(1+ICP)^NCY
Continuous Compounding with EX 1051.271 <= ID*EXP(Rate)

Compounding periods per Year End-year Accretion Effect of

1 1050.000 1051.500

2 1050.625
1051.000
10 1051.140

End-Year Accretion
20 1051.206 1050.500
50 1051.245
100 1051.258 1050.000
150 1051.262
1049.500
300 1051.267
800 1051.269 1049.000
1
Num
G PERIODS

Effect of Compounding Interval

1051.500

1051.000
End-Year Accretion

1050.500

1050.000

1049.500

1049.000
1 10 100 1000
Number of Compounding Intervals
 CONTINUOUS DISCOUNTING
Interest 8%

Contionuously
Year Cash Flow
Discounted PV
1 100 92.31
2 200 170.43
3 300 235.99
4 400 290.46
5 500 335.16

Present Value 1124.35

 CALCULATING RETURNS FROM PRICES
Initial Deposit 1000
End of year Value 1200
No. of Compounding Periods 2
Implied Annual Interest rate 19.09%

Continuous Return 18.23%

Implied Annual Interest rate with n Compounding Periods

No. of Compounding Periods Rate
19.09%
1 20.00%
2 19.09%
4 18.65%
8 18.44%
20 18.32%
1000 18.23%
LATING RETURNS FROM PRICES

<=((ID/EV)^(1/NCP)-1)*NCP

<=ln(EV/ID)

st rate with n Compounding Periods

 USING XIRR TO COMPUTE THE
ANNUALIZE INTERNAL RATE OF RETURN
Date Cash Flow
1-Jan-06 -1000
3-Mar-06 150
4-Jul-06 100
12-Oct-06 50
25-Dec-06 1000

IRR 37.19%
USING XNPV TO COMPUTE NET
PRESENT VALUE
Annual Discount Rate 12%

Date Cash Flow

1-Jan-06 -1,000
3-Mar-07 100
4-Jul-07 195
12-Oct-08 350
25-Dec-09 800

Net Present Value 16.80