ABSTRACT
Chapter 6 continues the discussion begun in Chapter 2 of scenarios (known as investment schemes) in which a sequence of deposits and/or withdrawals are made at various times. Given an interest rate we can compute the present or future value of the investment scheme. Conversely, given the ending (future) value of the scheme we can infer a constant interest rate which would account for that value. This hypothetical interest rate is known as the internal rate of return (IRR). The fundamental equations of value are introduced and, in some cases, solved directly. In many cases, a direct solution is not possible. In this case the use of the CF (cash flow) worksheet is discussed. Two estimates ( time-weighted and dollar-weighted) for the internal rate of return for short-term (one year or less) are discussed. The chapter concludes with a discussions of the yield rates associated with selling loans and the investment year and portfolio methods for computing the present value of an investment.
