So I work for a real estate development umbrella company and the developers that work within it borrow money as needed from the company and receive a percentage of the inflows after repayment of debt. I have been asked to calculate the IRR of this cashflow. It's my understanding that IRR is not appropriate because there are multiple switches from positive casflow to negative, and vice-versa. Is there a better metric that I should suggest be used instead?

enter image description here

Thanks,

New contributor
Marky Mark is a new contributor to this site. Take care in asking for clarification, commenting, and answering. Check out our Code of Conduct.
up vote 1 down vote accepted

There are two well known alternatives:

Modified IRR: You assume a reinvestment rate (for positive cash flows) and a financing rate (for negative cash flows). The calculation then is simple. Calculate the Future value (FV) of all positive cash flows using reinvestment rate, and calculate the Present value (PV) of all negative cash flows using the financing rate. Your problem is then reduced to finding the rate of return of a simple investment with alll outflows at the beginning and all inflows at the end. Excel has a built in function for this as well-MIRR.

Generalised IRR: Here again one assumes a financing rate, but reinvestment is assumed to be at the IRR ( which is yet to be estimated). Working backward from the final cash flow, one step at a time, discount the accumulated PV by one period at the IRR if it is positive, and at the fiinancing rate if it is negative. Continue until you reach time 0. Financing rate is assumed to be known, while IRR is to be estimated. You start the algorithm with an initial guess of IRR and apply a root funding algorithm, essentially iteratively updating IRR until PV of the cash flows become zero.

  • Thanks - That's the conclusion I reached from researching the issue, but just wanted affirmation and a well worded explanation. I appreciate your help! – Marky Mark Oct 11 at 22:56

Your Answer

Marky Mark is a new contributor. Be nice, and check out our Code of Conduct.
 

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.