Project IRR Vs. Equity IRR

A good principle to follow is to separate the project decision from the financing decision i.e.the project should be viable on a standalone basis, independent of the financing mix.

Therefore, initially IRR is determined at the project level, without considering cash flows related to financing. In this computation of project IRR, interest and debt-service payments are kept out.

As a separate exercise, debt-­service payments are introduced in the calculations and IRR is re-worked. Since the cash flows after debt-­service payments belong to equity shareholders, this re-worked IRR is essentially the return on equity invested in the project i.e.  Equity IRR.

Suppose that a project entails an investment of Rs. 600 crore. It is expected to generating operating cash flow of Rs. 100 crore in Year 1, going up by 30% each year for the following 3 years. At the end of Year 4, the project will have a salvage value of Rs. 300 crore. It is proposed to finance the project with a 2:1 debt­equity ratio. Given the company’s credit rating, it will be possible to borrow money for the project at 12% p.a., payable annually.

 

PROJECT  IRR Rs. Lakhs
  Year 0 Year 1 Year 2 Year 3 Year 4
Initial Investment

-600

Operating Cash flow

100

130

169

220

Growth

30%

30%

30%

Salvage Value

300

Total

-600

100

130

169

520

IRR

14.6%

 

 

EQITY IRR Rs. Lakhs
  Year 0 Year 1 Year 2 Year 3 Year 4
Cost of the Project

-600

Loan Mobilised

400

Equity Invested

-200

Operating Cash flow

100

130

169

220

Growth

30%

30%

30%

Loan Repayment
Principle Repaid

-100

-100

-100

-100

Interest

-48

-36

-24

-12

Salvage Value

300

Total

-200

-48

-6

45

408

IRR

17.03%

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Most dangerous words in financial world

Please check the following words before you invest, if they are there think twice before investing

  1. Offshore
  2. The opportunity of a lifetime
  3. Prime bank
  4. This baby’s gonna move
  5. Guaranteed
  6. You need to hurry
  7. It’s a sure thing
  8. Our proprietary computer model
  9. The smart money is buying it
  10. Option strategy
  11. It’s a no-brainer
  12. You can’t afford not to own it
  13. We can beat the market
  14. You’ll be sorry if you don’t
  15. Exclusive
  16. You should focus on performance, not fees
  17. Don’t you want to be rich
  18. Can’t loose
  19. The upside is huge
  20. There’s no downside
  21. I’m putting my mother in it
  22. Trust me
  23. Commodities trading
  24. Monthly returns
  25. Active asset-allocation strategy
  26. We can cap you downside
  27. No one else know how to do this.

2012 in review

The WordPress.com stats helper monkeys prepared a 2012 annual report for this blog.

Here’s an excerpt:

4,329 films were submitted to the 2012 Cannes Film Festival. This blog had 52,000 views in 2012. If each view were a film, this blog would power 12 Film Festivals

Click here to see the complete report.

Birthday wish from Google

Today i received a surprise Birthday wish from Google with its custom build Doodle

you need to login to the Chorme to receive this Doodle. if you click cake it will take you to google+ page.

Birthday wish from Google

How much interest I can afford

The RATE function returns the interest rate of an investment, loan, or annuity based on a series of regular periodic cash flows.

The syntax of the rate function is

RATE(NPER, PMT, PV, FV, type, guess)

 

NPER:  The number of periods. NPER is a number value and must be greater than or equal to 0.

 

PMT: The payment made or amount received each period. payment is a number value. At each NPR, an amount received is a positive amount and an amount invested is a negative amount. It is simple monthly payment you are intended to make or receive

 

PV: (present value) The value of the initial investment, or the amount of the loan or annuity. present-value is a number value. At time 0, an amount received is a positive amount and an amount invested is a negative amount. In other words the amount of loan you intended to take

 

FV: An optional argument that represents the value of the investment or remaining cash value of the annuity (positive amount), or the remaining loan balance (negative amount), after the final payment. future-value is a number value. it could be ballon amount.

 

Type: Type (optional) defines whether the payment is due at the beginning (1) or the end (0) of a period

 

Guess: Guess (optional) determines the estimated value of the interest with iterative calculation. normally it is ignored

 

lets understand the function with an example:

I want to borrow 80,000 and make monthly payment for 10 years. The maximum monthly payment i can afford is 1,000. what is the maximum interest rate i can afford?

 

Solution:

In the above example

NPER: number of month here we have been provided with 10 year that means NPER is equal to 10 X 12 = 120

PMT: Payment for the period, in our example it is given as 1,000 per month

PV: present value. here the present value will be 80,000 which is amount i am borrowing now. we are inputting this value with – before it, because it will be cash outflow for the lender.

FV: it is an optional argument in out case we will put 0

Type: it can be either 1 or 0,  in our example we are putting 0 assuming the installment will be paid at the end of the period (i.e. month)

Guess: we can leave this argument

 

the formula in cell B5 is =RATE(B2,B3,-B1,0,0)

 

I got the as 0.007241020100393 which i formatted using the % to convert it 0.72%

the above rate is period rate we have to convert this into annual rate

to convert this to annual rate we have multiplied it with 12

 

for the formula in cell B5 is =RATE(B2,B3,-B1,0,0)*12

the solution to the problem is

i can afford up to 8.69% interest for my loan of 80,000/- for a period of 10 years

Google Search Certificate

AVERAGEIF IN GOOGLE DOCS

There is no function called Averageif in google docs spreadsheet as on October 2012. The average function return the arithmetic mean of a given data. If you want to eliminate certain value in the data and calculate the average of the remaining number the averageif comes into picture. We will using the average function only but we can manipulate in such a way to get the desired results

Example 1:

 

The data is from Cell G2 to G11 containing 10 number if we want to calculate the average of numbers the formula will be =AVERAGE(G2:G11) which is equal to 138.4.

Suppose if we want to eliminate 0 (ZERO) while calculating the average then the formula will be

=ARRAYFORMULA(AVERAGE(IF(G2:G11>0;G2:G11)))

the result will be 173 as shown the above image.


Example 2:

 

in the above data set we want to calculate the average of the number which are between 150 and 160.

 

to achieve this we have used the following formula in cell B12

=ArrayFormula(AVERAGE(IF(B2:B11>=150;IF(B2:B11<=160;B2:B11))))

 

similarly the alternatives will be

=ArrayFormula(AVERAGE(IF((B2:B11>=150)*(B2:B11<=160);B2:B11)))

 =AVERAGE(FILTER(B2:B11;(B2:B11>=150)*(B2:B11<=160)))

or

=AVERAGE(QUERY(B2:B11;”select B where B >=150 and B <=160″))

the above formula uses single IF statement whereas the previous formula uses the nested IF function which sometimes may become complicated to understand.

 Similarly we can add any number of multiple conditions to calculate the average.