IRR and Loan
August 23, 2012
Loan is basically an investment for the financer. Consider yourself to the financer for the time being. You invest 10000 rupees. You will receive the returns in monthly instalments. Say 1000 per month for 11 months.
Now have a look at the cash flow
You will find the IRR function in any standard spreadsheet.
Now, say as a financer you get 1000 as upfront discount or subvention. In That case instead of 10000, you will have to pay 9000 only as investment. Now check the IRR
Instead of 19 % the IRR jumps to 42 %!!! This is the time value of money. 1000 rupees today is equal to 1100 rupees after 12 months.
So, if you are planning for a loan, focus on IRR. Flat rate of interests are misleading.
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