NPV, IRR, FMRR, MIRR, CpA – Stirring the Alphabet Soup of Real Estate Investment, Part 2

By Frank Gallinelli

At the end of Part 1 of this article we had just reached what appeared to be an epiphany of sorts. We looked first at Discounted Cash Flow, Net Present Value and Profitability Index, and found them almost but not quite up to our needs as real estate investors. We then turned Discounted Cash Flow on its head, solving for the rate rather than the Present Value. That rate – the Internal Rate of Return – looked like it provided a good measure of investment return and an excellent way to compare alternative investments because it was sensitive to the interplay between the timing and the magnitude of our investment’s cash flows.

That’s when I issued a “Not so fast” admonition, with the unabashed purpose of luring you back for the second part of this discourse.

All right – what are the problems with IRR and how do we deal with them?  Continue reading-->

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