IRR Calculation

To calculate IRR for a financial leasing company:

Annual interest rate charged: 11%

Lease duration: 2.5 years

Prepayment: 2 months (to offset last two months payments)

Upfront handling fee: 1.25% of total loan amount

From above, assuming a loan amount of $100, I got a monthly payment of $3.83 (=PMT(11%/12,30,-100,0)).

Then the cash flow schedule will look like this:

Month 0: -100+3.83+3.83*2(prepayment)+1.25(upfront handling fee) = -$87.27

Month 1-Month27: $3.83

Month 28-29: 0

From above cashflow, I got a monthly IRR of 1.25%, equal to an annual IRR of (1+1.25%)^12-1=16.07%

All these calculation are done by Excel (I don;t have CFA calculator with me at the moment), and I found this result extremely high. Any thoughts on things that may have gone wrong?

When annualized, you don’t considering the compounding feature. It would be simply 1.25%*12 = 15.04%. I did the calculations with the CFA calculator.