Rate vs. IRR
 

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.

Answer: Rate vs. IRR
 

Hi there!

The main difference between the IRR function and the rate function in Excel is that:

1. The IRR function calculates the internal rate of return for a stream of cash flows.
2. The rate function calculates the periodic interest rate for an investment based on its beginning and ending values.

In an LBO model, you would typically use the IRR function to calculate the internal rate of return for the cash flows generated by the investment. This is because the IRR function takes into account the timing and magnitude of each cash flow, which is important in determining the overall return on investment.

On the other hand, the rate function is typically used to calculate the periodic interest rate for an investment, such as a bond or loan. This function is useful for determining the interest rate that is being earned or paid on an investment, but it does not take into account the timing or magnitude of cash flows.

In summary, if you are trying to calculate the overall return on investment for an LBO model, you should use the IRR function. If you are trying to calculate the periodic interest rate for an investment, you should use the rate function.

Rate vs. IRR
 

"Phin Lars" wrote:
I don't understand the difference between using an
IRR function (over a stream of cash flows) and the
rate function

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.


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

"Phin Lars" wrote in message
...
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.