Differentiate between rate of interest and internal rate of return.

Banking & FinanceManagementCompanies/Organisations

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.

raja
Published on 25-Jul-2020 10:22:15
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