Why IRR is Not the Rate of Return for Your Investment: Introducing AIRR to the Real Estate Community

Dean Altshuler () and Carlo Alberto Magni

No 8354, Proyecciones Financieras y Valoración from Master Consultores

Abstract: The internal rate of return (IRR) is used extensively in the real estate sector, notwithstanding certain nagging deficiencies taught in most business school texts, such as that the IRR may have multiple solutions which cannot be reconciled; or that it may lead to decisions that are not consistent with net present value. Unbeknownst to most practitioners, two of the more serious alleged deficiencies have been refuted in the last decade, seemingly great news for IRR advocates. However, the elimination of these deficiencies exposes a more fundamental criticism, one which is addressed in this article; and it is that the IRR is associated with interim project values that are implied by the IRR equation itself and almost surely differ from the true interim values of the project under consideration. To the extent that these values differ, the IRR result will not be an accurate rate of return. Furthermore, such values implied by IRR will almost surely contradict any estimated project values used for time-weighted rate of return (TWR) purposes. A new metric called AIRR (Average IRR) overcomes these criticisms and produces a correct (dollar-weighted) rate of return for a project. Furthermore, AIRR has none of the problems that IRR has; most importantly, its solution always exists and is unique.

Keywords: real estate; internal rate of return; average; interim capital (search for similar items in EconPapers)
Pages: 15
Date: 2011-04-27
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://ssrn.com/abstract=1825544

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000463:008354

Access Statistics for this paper

More papers in Proyecciones Financieras y Valoración from Master Consultores
Bibliographic data for series maintained by Ignacio Velez ().