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Why should the Total row be at the top and not bottom?
When iterations need to be done to arrive at IRR, it becomes difficult to scroll down
every time to see if NPV is zero. Typical situations when iterating rates needs to be
done is when you need to arrive at the EMI which will give the same IRR as earlier
situation or Target IRR.
The Discount rate refers to the (1 + r) such as 1.01447 whereas the Discount factor refers
to the factor such as 0.9857366 being [1/1.01447]. Why it is advisable to have Discount
rate column and Discount factor column? For what kind of problems will having these
extra columns help?
When cash flows arise in between the start and end time points such as Interest on
Security deposit, or Bullet payments, the Discount factor as a separate column becomes
useful. Whenever Discount factor is to be worked out, it is useful to have Discount
column additionally from which Discount factor can be derived. Also when modification
in EMI is to be assessed in terms IRR, reiterating on Discount rate is more easy than
applying IRR function of MS-Excel each time.
Cash flows versus Amortization:
Amortization is an accounting format, designed to capture what income is to be reflected
in the P & L account. Amortization flows from Cash flows. The IRR is the rate at which
income is recognized in the books. If IRR is worked out correctly the Total of Interest as
per Amortization chart will be equal to Net Cash flows as per Cash flow format. This
check for ascertaining the correctness of working is useful for all variations of problems.
Financial year interpretation from Amortization chart:
The chart of Cash flows and hence Amortization workings extend for 60 time periods.
However the Financial year runs from April to March. The Income recognition therefore
needs to be applied Financial year-wise.
Annual rests, Annual rates with monthly rests and Daily rests:
How is Annual rates with monthly rests different from Monthly compounding?
Q: Assessing IRR
Ans: Fill in all cash flows without leaving any Row blank. Do not use two or more Rows
for same year i.e: EMI received by MMFSL as also Interest paid in same year by
MMFSL on Security deposit.
Apply MS-Excel Finance function IRR.
Convert from Monthly rate to Annualised rate by either Product or Power method.
Q: What if MMFSL wishes to take Security deposit, assuming no interest is payable?
Ans: Change cash flows in time periods 0 and last period.Calculate revised IRR.
Q: At what EMI would MMFSL achieve the old IRR by taking Security deposit (without
interest)?
Ans: Feed in the old IRR i.e: [1+r] under Discount Rate in Time 1. Iterate for different
EMIs in Cell C3.
Q: What if MMFSL agrees to pay interest ( say @ 14% pa) on the Security deposit? For
convenience assume the interest is paid all in one lump sum at end alongwith return of
Security deposit.
Ans: Would the cash flows in time periods 0 and last period change? Change cash flows
in last time period only. Calculate revised IRR.
Q: At what EMI would MMFSL achieve the old IRR by taking Security deposit (with
interest)?
Ans: Feed in the old IRR i.e: [1+r] under Discount Rate in Time 1. Iterate for different
EMIs in Cell C3.