Investor · Suwanee, GA · Member since 2014 · 579 posts · 347 votes
IRR Question for the community:
When looking over proformas with other Seoul REI Meetup members @Benjamin Hauser and @Jean Luc , we've noticed IRR calculations presented in two ways.
#A
The initial cash investment is considered separately.
Then the cashflows and exit amount are added in.
The IRR is presented at the end.
#B
Year 1 cashflow is subtracted from the initial cash investment.
Then the cashflows and exit amount are added in.
The IRR is presented at the end.
I know it might depend on your 'perspective'. But since "B" will return a more favorable return, is there a standard accepted model for IRR calculations?
Investor · Milwaukee, WI · Member since 2015 · 28 posts · 2 votes
10y
ideally,the most common way format in the first example. Your initial cash output will be a negative number or in parenthesis, they mean the same. Next you lay out future cash flows received each year for duration of holding period.
What you need to know is, your initial cost of capital, required rate of return (hurdle rate) and the present value of those future cashflows. As you know, cash today and cash received in the future doesn't equal.
I would also say it's important to understand Net Present Value in tandem with IRR.
The second example will present incorrectly if using excel function because the first years investment will be discounted, presenting a higher IRR.