Differentiate between rate of interest and internal rate of return.

The major differences between rate of interest and internal rate of return are as follows −

Rate of interest

• It is used to calculate performance of the investment over a period of time.

• The formula to calculate the rate of interest is Rate of interest = [(excepted value – original value)/original value}*100.

• It can estimate growth rate over the investment period.

• It does not consider future value of money.

• It is relatively easy to calculate.

Internal rate of return

• It is used to calculate the rate of return on an investment for shorter period of time.

• The formula for calculating the internal rate of return is Internal rate of return = current invest – future NPV@IRR rate = zero.

• It considers time value of money.

• It considers several factors to calculate.

• It is bit complex to calculate.

The similarities between internal rate of return and rate of interest are stated below −

• Both represents annual rate of return.

• Both are expressed in terms of percentage.

• They are used for backward evaluation of investments.

• They are used for forward estimation of performance.