Hi, Probably a simple answer, but I don't seem to get it. I've always been taught the IRR is the equivalent of the rate i'd get if I invest the same amount at a bank. (Or the % I need to compare my investment to a loan). Now, calculating it in Excell gives me results I don't understand. Let's assume: Investment: 8000 € Yearly income 1500 € That's a Payback Time of 5,3 yrs Now, over a period of 10, Excel calculates an IRR of 13% Cashflow wise, i have 7000 € in hand at the end of the 10 yrs....Which is nowhere close to the 13% of course. If I had invested the 8000 € @ 13% I'd have 27157 € in hand. Any help is much appreciated Thanks
It's because the investment has an initial outflow of -8000. I guess you can look at it as 8000 which is gone (but you have an investment vehicle in its place). That is not earning interest (key to getting interest rates), but it will generate cash. Whereas the bank, you are depositing 8000 which you can get back at any time.
Thanks DevilsAdvocate, Is there a financial tool/term/concept which compares such an investment to an investment in a bank? I'm in the field on energy savings, so the example above considers an investment in photovoltaics. Now, I do notice that for comparing it to a loan, it seems to approximately work. I'd lend 8000 € from a bank for 10 yrs @ 13% (13,434%, the value of the IRR), I'd pay 1.458 yearly, for an income of 1500 yearly...
That's a good question I was wondering myself, it's been too long since I've been out of college. Well...it looks like the IRR Excel is giving you is the rate of interest necessary to make the net PRESENT value of your cash flows equal to 0. I may be wrong about this, but you may want to look into it. Whereas you seem to want to know what rate the bank would have to give you to get 15,000 at the end of 10 years.
Thanks, will look into it. Would you have any links to sources where I can dig a little further? I did just realise I did make a mistake: at the end of the 10 yrs I don't have 7000 in hand, but 8000 (initial investment) + 7000 extra. So 15000, which still isn't close to the 27000 of the equivalent bank investment @ 13%.
