Rate vs. IRR

  • Thread starter Thread starter Phin Lars
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Phin Lars

Hi,

I'm building an LBO model and I don't understand the difference
between using an IRR function (over a stream of cash flows) and the
rate function (equity returns, using ending equity and beginning
purchase price). Any help would be appreciated.

Thanks.
 
Phin Lars said:
I don't understand the difference between using an
IRR function (over a stream of cash flows) and the
rate function
Click to expand...

Generally, use RATE when all cash flows are the same and they occur at
regular time intervals. Use IRR when cash flow amounts vary, but they occur
at regular intervals. Use XIRR when cash flow amounts vary and they occur
at irregular intervals.

Caveat: The Excel XIRR function always returns an annualized compounded
rate, whereas the RATE and IRR functions return periodic rates. It is
debatable how to annualize rates: compound periodically, or simply multiply
by the number of periods per year. To some degree, it depends on the
application and applicable regulations; for example, the US Truth in Lending
regulation requires simple multiplication.


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