Internal Rate of Return and Real Estate

Internal Rate of Return
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Craig Sanders, USA

Internal Rate of Return and Real Estate

As an example if an owner puts up $7,500,000 equity to buy an office building. After 10 years it threw of $7,000,000 of cash flow. The owner wants to turn the project over to a management company to manage. If IRR is used to see how well the manager does what is considered the equity investment to use at the starting point in year 11?

  Leon Ploubidis
Manager, Australia
 

Opportunity Cost

It needs to be the market value at the time, not the original purchase price. In Capital Budgeting, we need to account for Opportunity Cost in the cash flows, and this includes the value you could sell the property for today. So, to break down, the current market value is essentially the original purchase price, plus the opportunity cost.

 

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