What is IRR and How Does it Work_ gov housing benefit

I think the theory of the reinvestment rate refers to deferred cash flows and not cash flows paid current. IRR by its inherent calculation is the discount rate on the cash flows received that set the NPV to 0 for an investment/project. Thus, for cash flows received, the return assumes nothing regarding the reinvestment of those cash flows since those would be outside the current project and into another asset, which would be outside of the scope of the project you’re discounting. For deferred cash flows, it makes 100% reason to assume that an investor would require the same yield on deferred cash flows into a project with respect to the initial investment. A deferral is in essence a reinvestment into the same project as the project keeps those cash flows and doesn’t return it back to the investor, presumably to reinvest back into the project.Gov housing benefit calculator

thus, why would you expect a different yield? The only basis I can think of is if the deferred cash some how super-primes the cash flow returns to the initial investment or if they are gauranteed by some 3rd party, in which case they can be considered less risky computed at a different rate, which would drop the IRR. On the other hand, if they are riskier than the initial investment cash flows in any type of subordination, then the IRR would go up, since the yield would be reflective of the repayment of these riskier cash flows. But undoubtedly, deferred cash flows have to be reinvested at some rate and it makes 100% sense that that rate is the same as the initial investment, and thus it must be taken into account when computing IRR.

Thanks for your article. One question: if the IRR is the discount rate which mathematically sets the NPV of your investment to zero, then this means that it is the maximum discount rate you could plug in before the investment becomes unworthy.Gov housing benefit calculator I.E. If you use a higher discount rate the NPV becomes negative, right? Following this logic, the higher the IRR, the better the investment opportunity since it gives you more leeway to a negative NPV, right? Now how does this fit with your definition: the IRR is the percentage rate earned on each dollar invested for each period it is invested?

This paper introduces a new method to estimate the NPV based on capital amortization schedule (CAS) and not the conventional DCF method. The new method is more transparent. This paper questions the validity of the NPV as a preferred criterion than IRR. The results also clarify that there is no reinvestment of intermediate income, as CAS does not involve reinvestment. When there is no reinvestment, the MIRR estimate is also redundant.

This paper presents evidence to identify the most appropriate investment criterion (IRR vs NPV) with emphasis on the controversial multiple, negative and no IRR, mutually exclusive investment and independent projects.Gov housing benefit calculator the analysis is based on the estimated return on capital (ROC), return on invested capital (ROIC) and capital amortization schedule (CAS).

The analytical results presented in these papers question some of the conventional wisdoms advocated by most finance and economic texts or project analysis guide or publications or teaching materials and therefore the contents will enable the respective authors or organization to revise or update their publications accordingly.

I think we are mostly on the same page, except for one, reinvestment assumption. If a project doesn’t have interim cash flows, the re-investment theory is simply implying that the unrealized gains that remain in the project, are growing at the calculated compounded rate is in-itself the re-investment.

I understand your interpretation, in that technically you are not reinvesting because you don’t have interim cash on hand and the money is compounding automatically, however given that the IRR calculation makes the same assumptions if the payout is interim or at the end, the re-investment notion is simply telling us that,

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1) if there are no interim cashflows, and the investment IRR is calculated based on the initial compounded amount, you have no access to the gains until they are realized, and you receive the calculated IRR.

2) if there are interim cashflows, then the IRR calculation is assuming the same thing as the previous calculation, the difference is if you have interim cashflow, it must be re-invested at exactly the same rate in order to get the same exact IRR, other wise the compounding will not yield the same result.

Given that both calculations have the same underlying assumptions, with the first example, you don’t have to physically re-invest, however since you don’t have access to the gains, you have to treat them as if they are re-invested because of opportunity cost. If however you have interim cash flow, the burden of re-investment is on the receiver, because the IRR calculation is assuming your money is still compounded year after year, hence you assume re-investment.Gov housing benefit calculator

I completely understand your point of view, but given that other investments yields interim cash-flows, you can’t ignore the difference, re-investment assumption reconciles this, where one investment automatically yields the return at the end, and the other one has to be re-invested, therefore we treat the first investment “as-if” it’s re-invested, because once again, you can’t ignore the differences with one investment yielding tangible cashflow, and the other un-realized gains.

“why does this matter? Let’s take another look at the total cash flow columns in each of the above two charts. Notice that in our first example the total $161,051 while in the second chart the total cash flow was only $144,475. But wait a minute, I thought both of these investments had a 10% IRR”

Yeah, both have a 10% IRR, but if you consider that the cashflow is reinvested you can easily explain the difference.Gov housing benefit calculator the difference comes from the fact that you are not considering time value of money from interim cashflow, so 144,475 shoud be different from 161,051 symply because the money is received at different periods. If you reinvest at 10% IRR rate the interim cashflow, you easily arrive at a final value of 161,051.

So, concluding, if I have a 10% IRR, and a 100,00 initial apport, reinvesting the interim cashflow’s I will always arrive at a final value of 161,051, no matter what distribution of cashflow I have for a 10% IRR.

“as you can see, the MIRR when using a 10% reinvestment rate is 15.98%. This is less than the 18% IRR we initially calculated above. Intuitively, it’s lower than our original IRR because we are reinvesting the interim cash flows at a rate lower than 18%”