![]() ![]() If $100 is invested today at an annual 5.0% interest rate, then the investment will grow at 5.0% each year and after four years the investment will have grown to $121.55. Table 1 below illustrates this concept on a $100 investment held for five years at a 5.0% annual rate of return. To determine the future value of an initial investment we apply a rate of return to the investment over the investment hold period. The time value of money works in two directions: looking forward with “future value” and looking back with “present value.” In order to get a better feel for what IRR does, we need to spend a few minutes talking about the time value of money. ![]() IRR can be confusing for those new to it, both mathematically and conceptually. Overview of Future Value and Present Value A later section will deal with the differences between the two methods, but first we’ll review a few basic financial concepts and then take a closer look at exactly what the IRR is. However, even between the NPV and IRR methods there is a subtle difference that analysts need to be aware of. Unlike more static valuation methods such as cap rate, gross rent multiplier, price per square foot, and replacement method, the Net Present Value (NPV) and IRR methods use both long-term cash flows and rates of return to get a better idea of the potential value of a property. Among the many valuation methods for real estate, the Internal Rate of Return (IRR) method is probably the most commonly used among those that analyze long-term cash flows of a property. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |