Dr. Precision Financial Calculator

Example V-4 Investment and Loan: Two sides of a coin

If you borrow a loan from a lender, of course you want the interest rate as low as possible. However, to the lender, this business deal is an investment. The lender wants the return as high as possible. Use the loan calculator and the investment calculator to verify that the interest rate from the loan calculation is just the IRR from the investment calculation.

[Solution]

Suppose you borrow a \$100,000 loan. The term is 15 years and the monthly payment is \$990. Enter \$100,000 for the total amount of the loan, 180 for the number of months, \$990 for the monthly payment, then click RUN button. The equivalent interest rate is 8.59% APR.

Now turn to the investment calculation. Enter -100,000 to the first column (the lender invests this amount on the first month). Enter 990 from row 2 to row 181. Don't type into the cell one by one! Type 990 on the second row and hit Enter key, point the mouse pointer to the lower right corner of this highlighted cell, you will see the pointer icon change to cross-hair. Now drag this cross hair all the way down to row 181. Select Monthly as the cash flow period type. Now click on the first cell and drag down to row 181. You will see the IRR is 8.59%!