How to use internal rate of return (IRR)
The rate to 12 percent three ways we can do this we can do this with formulas
We can do this with the tables
We can do this with Excel
We're going to be taking a look at these tables and excel
In this example if we look at the table to the right we have the rate and we have the period rate up
top the period to the left
The main point here is that we don't see the rate per period
In other words what are we talking about months years or what now
What's going to be a period that we are using not given in the table
We can use the tables as long as we use the same period in terms of the rates and the number of periods
that periods
We can't change on the table it is what it is it's going to be five periods the rate we can change
So the rate we change by saying hey this is 12 percent we want a monthly rate therefore we can take
that and divide it by twelve and that'll give us our monthly rate
Note that in order to use the tables because they only have even percentages we can only do this if
we had some monthly rate that was even to use the tables and that's not always the case
Therefore the tables aren't always the best thing to use and that's also why they might not have monthly
type of periods within book questions if they're if they're required us to use the table in practice
we may well have months
It's not a problem for us
I use fractions within an Excel type of calculation
Okay
So we're going to take the 12 percent we'll divide it by 12 we'll get 1 percent per month
So here's our 1 percent per month
And here is the 5 number of periods we're going to have the amount of 1 point 0 5 1 0
So the amount ten thousand then our table amounts one point 0 5 1 0 and that's going to give us our
future value ten thousand five hundred and ten
So again that's going to be with the use of the 1 percent as opposed to the 12 percent given the fact
we're talking about months rather than years
That's the key point
If we look at Excel then same data now in Excel future value function f v function that we will be using
Here's the function box rate up top the B four is gonna be the cells so here's B for that's gonna be
twelve percent so there's R R B four divided by twelve that's the key point
Now if it was something other than a even number then that would be okay for excel in this case it's
1 percent
So 1 percent is gonna be what we have then we have the number of periods is b 2 5 those two coincide
5 months monthly rate and then we have the payment is gonna be 0
This not being an annuity but a single sum present value then B three B three being the 10000 result
is negative ten thousand five ten and then of course if we show that in Excel it's gonna be recorded
If we want to flip the sign we can put a negative in front of the future value
That's how I would do it and that'll give you a positive number in essence taking the balance multiplying
at times negative 1 and then so here we have the future value brackets the rate if we want to type it
in this way which we can of course type it in this way as well the rate being in b4 so within before
we have the twelve percent taking that dividing it by 12
The next function we use a comma and go to the next argument which is the number of periods
So that's going to be in b 2 so b 2 is b 2 it's 5 and then we say comma go to the next argument the
number of the payment that's going to be 0 because this is not an annuity we're talking about a single
sum and then the next argument in B 3 is going to be the present value that's in B 3 that's the ten
thousand
We can do this with the tables
We can do this with Excel
We're going to be taking a look at these tables and excel
In this example if we look at the table to the right we have the rate and we have the period rate up
top the period to the left
The main point here is that we don't see the rate per period
In other words what are we talking about months years or what now
What's going to be a period that we are using not given in the table
We can use the tables as long as we use the same period in terms of the rates and the number of periods
that periods
We can't change on the table it is what it is it's going to be five periods the rate we can change
So the rate we change by saying hey this is 12 percent we want a monthly rate therefore we can take
that and divide it by twelve and that'll give us our monthly rate
Note that in order to use the tables because they only have even percentages we can only do this if
we had some monthly rate that was even to use the tables and that's not always the case
Therefore the tables aren't always the best thing to use and that's also why they might not have monthly
type of periods within book questions if they're if they're required us to use the table in practice
we may well have months
It's not a problem for us
I use fractions within an Excel type of calculation
Okay
So we're going to take the 12 percent we'll divide it by 12 we'll get 1 percent per month
So here's our 1 percent per month
And here is the 5 number of periods we're going to have the amount of 1 point 0 5 1 0
So the amount ten thousand then our table amounts one point 0 5 1 0 and that's going to give us our
future value ten thousand five hundred and ten
So again that's going to be with the use of the 1 percent as opposed to the 12 percent given the fact
we're talking about months rather than years
That's the key point
If we look at Excel then same data now in Excel future value function f v function that we will be using
Here's the function box rate up top the B four is gonna be the cells so here's B for that's gonna be
twelve percent so there's R R B four divided by twelve that's the key point
Now if it was something other than a even number then that would be okay for excel in this case it's
1 percent
So 1 percent is gonna be what we have then we have the number of periods is b 2 5 those two coincide
5 months monthly rate and then we have the payment is gonna be 0
This not being an annuity but a single sum present value then B three B three being the 10000 result
is negative ten thousand five ten and then of course if we show that in Excel it's gonna be recorded
If we want to flip the sign we can put a negative in front of the future value
That's how I would do it and that'll give you a positive number in essence taking the balance multiplying
at times negative 1 and then so here we have the future value brackets the rate if we want to type it
in this way which we can of course type it in this way as well the rate being in b4 so within before
we have the twelve percent taking that dividing it by 12
The next function we use a comma and go to the next argument which is the number of periods
So that's going to be in b 2 so b 2 is b 2 it's 5 and then we say comma go to the next argument the
number of the payment that's going to be 0 because this is not an annuity we're talking about a single
sum and then the next argument in B 3 is going to be the present value that's in B 3 that's the ten
thousand
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