"Dana DeLouis" wrote:
Mathematically, all payments from 121 to 240 were brought back to time 120
at the IRR rate, and then brought back to time 0 at the IRR rate also.

However, for #2, you used the remaining loan balance at time 120. You
brought all payments after 120 to time 120 at the known mortgage rate, and
then brought it to time 0 at the IRR rate.

But if the longer (mortgage) loan rate is the same as the IRR in the second
case (early payoff of the longer loan), "all payments from 121 to 240 are
brought back to time 120 at the IRR rate, and then brought back to time 0 at
the IRR rate also", just as they are in the first case (both loans run to
term).


The high Equity Loan is not part of any calculations after time
120 as in the first example.

These two differences are why they are different.

But under some conditions, the two IRRs are the same, not different, despite
the fact that "the equity loan is not part of any calculations after time
120" in the second case.


I think you are assuming what it is that we want to explain namely: (a) the
longer (mortgage) loan rate is not the same as the second IRR, and (b) the
two IRRs are different, (c) both under some conditions to be specified.

Of course, I have "explained" all of this with rigorous math proofs. So we
know that the #a and #b are indeed true, and we know that #c is whenever the
loan interest rates are different.

But I am sure that everyone, myself included, would prefer a more
common-sense explanation, along the lines of yours, that does not already
make these assumptions.


----- original message -----

"Dana DeLouis" wrote in message
...
I have a problem with a discrepancy between two different IRRs
(calculated on the same cash flow but in two different ways) that, in my
opinion should be exactly the same.


Hi. I'll try my best here.

For #1, all payments after time 120 were brought back to time 0 at the
unknown irr rate. The higher rate for the Home Equity Loan was spread
out from 10 years, to 20 years. Hence, the IRR for IRR #1 should be
lower.

Mathematically, all payments from 121 to 240 were brought back to time 120
at the IRR rate, and then brought back to time 0 at the IRR rate also.

However, for #2, you used the remaining loan balance at time 120. You
brought all payments after 120 to time 120 at the known mortgage rate, and
then brought it to time 0 at the IRR rate. The high Equity Loan is not
part of any calculations after time 120 as in the first example.
These two differences are why they are different.

Hope I said this right. :)

Dana DeLouis



On 12/23/09 7:10 PM, Ben wrote:
Hello all,
I have a problem with a discrepancy between two different IRRs
(calculated
on the same cash flow but in two different ways) that, in my opinion
should
be exactly the same.
Any one willing to take a crack at it and maybe provide some kind of
explanation is welcome to contact me at , and I will send
over
the excel sheet with the problem. Please note that a basic understanding
of
the time value of money and financing is required.
Thanks in advance for any assistance,
Ben.