Shows how the Internal Rate of Return (IRR) is calculated, what factors are important, and how to use planEASe Sensitivity Analysis to investigate which assumptions the Internal Rate of Return (IRR) is sensitive to. Also, if you are interested how to verify the monthly NPV look to this page Verify Monthly IRR and NPV Using Excel or Google Spreadsheets XIRR and XNPV.

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Internal Rate of Return (IRR)
for commercial real estate
investments and developments

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Why is Internal Rate of Return IRR
useful for commercial real estate?
The nature of the IRR is that it takes everything into account that made up the cash
flow. The only weakness is that it is hard to calculate (not with planEASe of course),
and that it uses all the assumption values (so, in turn, you are required to enter these
assumptions, which means more work on your part).

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Internal Rate of Return (IRR) Considers:
Considers / Ignores
• Considers: All assumptions entered such as: Scheduled Income, Purchase
Price, Down Payment, Current Debt Payment, Vacancies, Expenses,
Property Taxes, Lease terms, Revenue Growth, Rent Control, Expense
Growth, Property Tax Growth, Deferred Maintenance, Debt Amount
(Ratio), Interest Rate, Interest Rate Changes, Payment Changes, Points,
Prepayment Penalties, Depreciation, Capital Expenditures, Income Taxes,
$25,000 Exemption, Passive Losses, Appreciation, Capital Gains Tax ... and
all other entered assumptions
• Ignores: Only assumptions not entered

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Of course IRR's took forever before computers, and even took a very long time on those old computers with no
mouse. These days the computers are so fast that monthly IRR's are done almost instantly. In the world of
commercial real estate, cash flows occur monthly and the dollar amounts of the revenue and expense cash flows
are almost always irregular. In the past there were mathematical games that were played to get the IRR to reflect
the monthly irregular cash flow, and you might still hear some of the old ways spoken of today, like "beginning
or end of period" or "mid year convention" (Monthly vs Yearly IRR Discounted Cash Flow Measure
Comparison). These tricks were necessary in a world where you typed individual cash flows into a calculator or
spreadsheet. However, in the modern computing world there is no need for these mathematical tricks, because
computers are now fast enough to handle the present value discounting process on a monthly basis. The initial
process for computing IRR in Excel and other spreadsheets made the assumption that the cash flows occurred
annually and at the end of the year. With the new speed of computers, it became feasible to compute IRR more
accurately by including the date of the cash flow as well as the amount. This new (and much more accurate)
method of computation is known within Excel (and other spreadsheets) as the XIRR function. Here are links to
descriptions of the XIRR process:
• Excel XIRR Description
• MATLAB XIRR (Internal rate of return for nonperiodic cash flow) Description
• Google Spreadsheet XIRR Description
Monthly Calculations

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If you are interested how to verify the monthly NPV look to this page
Verify Monthly IRR and NPV Using Excel or Google Spreadsheets
XIRR and XNPV. Also there is an "IRR Verification Report" shown at
the end of this article that has all the monthly information to use for the
verification for the last IRR After Tax.
XIRR Verification

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Internal Rate of Return (IRR) Example
2010 2011 2012 2013 2014 2015
IRR Before Debt 1.5% 9.0% 9.9% 9.0% 9.5% 8.0%
IRR Before Tax 9.2% 12.1% 9.5% 11.0% 7.0%
IRR After Tax 6.5% 8.8% 6.6% 7.8% 4.6%
NPV Before Debt @10.00% ($246,299) ($54,097) ($8,769) ($106,089) ($66,107) ($273,216)
NPV Before Tax @10.00% ($236,599) ($16,136) $56,761 ($17,540) $42,716 ($146,603)
NPV After Tax @10.00% ($233,929) ($68,875) ($32,053) ($121,655) ($95,859) ($265,158
You may think of the IRR as the annual Interest Rate or Yield (compounded annually) that
the investment is paying you over the Holding Period. Naturally, the higher the yield, the
better the investment.

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Watch Video
about Internal Rate of Return (IRR)

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Try out this ratio yourself !!!
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