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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.
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