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The document discusses the internal rates of return (IRR) and introduces the NXIRR function to address the limitations of the XIRR function in identifying multiple IRRs. It includes exercises related to cash flows, investment decisions, loan calculations, and the use of Excel for financial analysis. Various scenarios are presented to calculate IRR, NPV, and loan payments under different conditions.

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Wycliff Ndua
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16 views9 pages

Deferred

The document discusses the internal rates of return (IRR) and introduces the NXIRR function to address the limitations of the XIRR function in identifying multiple IRRs. It includes exercises related to cash flows, investment decisions, loan calculations, and the use of Excel for financial analysis. Various scenarios are presented to calculate IRR, NPV, and loan payments under different conditions.

Uploaded by

Wycliff Ndua
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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From the data table, it is evident that there are two internal rates of return

(around 5% and around 39%). But the XIRR function does not identify either

(see cells B4:B6).

The function NXIRR i xes this bug:

10

11

12

13

14

ABC

Discount rate -3.00%

IRR 5.06% <-- =nXIRR(B8:B14,A8:A14) , no Guess

38.77% <-- =nXIRR(B8:B14,A8:A14,35%), Guess = 35%

5.06% <-- =nXIRR(B8:B14,A8:A14,5%) , Guess = 5%


Date Cash flow

30-Jun-14 -500

14-Feb-15 100

14-Feb-16 300

14-Feb-17 400

14-Feb-18 600

14-Feb-19 800

14-Feb-20 -1,800

NXIRR FIXES THE XIRR BUG

Exercises

1. You are offered an asset costing $600 that has cash l ows of $100 at the end of each of

the next 10 years.

a. If the appropriate discount rate for the asset is 8%, should you purchase it?

b. What is the IRR of the asset?

2. You just took a $10,000, 5-year loan. Payments at the end of each year are l at (equal in

every year) at an interest rate of 15%. Calculate the appropriate loan table, showing the

breakdown in each year between principal and interest.

3. You are offered an investment with the following conditions:

• The cost of the investment is 1,000.

• The investment pays out a sum X at the end of the i rst year; this payout grows at the

rate of 10% per year for 11 years.

If your discount rate is 15%, calculate the smallest X which would entice you to purchase

the asset. For example, as you can see in the following display, X = $100 is too small—the
NPV is negative:

46 Chapter 1

10

11

12

13

14

15

16

17

ABC

Discount rate 15%

Initial payment 129.2852

NPV -226.52 <-- =B6+NPV(B1,B7:B17)


Year Cash flow

0 -1,000.00

1 100.00 <-- 100

2 110.00 <-- =B7*1.1

3 121.00 <-- =B8*1.1

4 133.10

5 146.41

6 161.05

7 177.16

8 194.87

9 214.36

10 235.79

11 259.37

4. The following cash-l ow pattern has two IRRs. Use Excel to draw a graph of the NPV of

these cash l ows as a function of the discount rate. Then use the IRR function to identify

the two IRRs. Would you invest in this project if the opportunity cost were 20%?

10
AB

Year Cash flow

0 -500

1 600

2 300

3 300

4 200

5 -1,000

5. In this exercise we solve iteratively for the internal rate of return. Consider an

investment

which costs 800 and has cash l ows of 300, 200, 150, 122, 133 in years 1–5. Setting up

the loan table below shows that 10% is greater than the IRR (since the return of principal

at the end of year 5 is less than the principal at the beginning of the year):

47 Basic Financial Calculations

Setting the IRR? cell equal to 3% shows that 3% is less than the IRR, since the return of

principal at the end of year 5 is greater than the principal at the beginning of year 5.

By changing the IRR? cell, i nd the internal rate of return of the investment.

6
7

ABCDEFGH

IRR? 10.00%

LOAN TABLE

Year Cash flow Year

Principal

at beginning

of year

Payment

at end of

year

Interest Principal

0 -800 1 800.00 300.00 80.00 220.00

1 300 2 580.00 200.00 58.00 142.00

2 200 3 438.00 150.00 43.80 106.20

3 150 4 331.80 122.00 33.18 88.82

4 122 5 242.98 133.00 24.30 108.70

5 133 6 134.28 <-- Should be zero for IRR

Division of payment

between:

1
2

ABCDEFGH

IRR? 3.00%

LOAN TABLE

Year Cash flow Year

Principal

at beginning

of year

Payment

at end of

year

Interest Principal

0 -800 1 800.00 300.00 24.00 276.00

1 300 2 524.00 200.00 15.72 184.28

2 200 3 339.72 150.00 10.19 139.81

3 150 4 199.91 122.00 6.00 116.00


4 122 5 83.91 133.00 2.52 130.48

5 133 6 -46.57 <-- Should be zero for IRR

Division of payment

between:

6. An alternative dei nition of the IRR is the rate which makes the principal at the

beginning

of year 6 equal to zero. 9 This is shown in the printout above, in which cell E9 gives the

principal at the beginning of year 6. Using the Goal Seek function of Excel, i nd this rate

(below we illustrate how the screen should look).

9. In general, of course, the IRR is the rate of return that makes the principal in the year

following

the last payment equal to zero.

48 Chapter 1

(Of course you should check your calculations by using the Excel IRR function.)

7. Calculate the l at annual payment required to pay off a 13%, 5-year loan of $100,000.

8. You have just taken a car loan of $15,000. The loan is for 48 months at an annual interest

rate of 15% (which the bank translates to a monthly rate of 15%/12 = 1.25%). The 48

payments (to be made at the end of each of the next 48 months) are all equal.

a. Calculate the monthly payment on the loan.

b. In a loan table calculate, for each month: the principal remaining on the loan at the

beginning of the month and the split of that month ’ s payment between interest and

repayment of principal.

c. Show that the principal at the beginning of each month is the present value of the
remaining loan payments at the loan interest rate (use either NPV or the PV

functions).

9. You are considering buying a car from a local auto dealer. The dealer offers you one of

two payment options:

• You can pay $30,000 cash.

• The “deferred payment plan”: You can pay the dealer $5,000 cash today and a payment

of $1,050 at the end of each of the next 30 months.

As an alternative to the dealer i nancing, you have approached a local bank, which is

willing to give you a car loan of $25,000 at the rate of 1.25% per month.

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