IRR on a loan
If a company is funding a financing facility and uses borrowed money, why is the IRR on the loan they take out positive? For instance $2.5m at 5% paid for 3 years has an IRR of 5%, but shouldn't this be a negative IRR for the company because they took out the loan? You can't just get a return from taking out a loan... Please help. Thanks
One man's cost is another man's return.
Consider the following lending relationship: A borrows $100 and pays 10% annually for 5 years B loans $100 and receives 10% annually for 5 years
A's CF: +100; -10; -10; -10; -10; -110 B's CF: -100; +10; +10; +10; +10; +110
Put both into Excel's IRR function. You'll get the same answer. I think you're getting hung up on terminology when you should think about the definition. IRR is when NPV = 0. Or in other words, the discount rate for which a given cash flow is neutral.
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