Hey all,
I have been playing around with Feastudy (a feasability software) and have come out of it very confused.
I have put two different scenarios into feastudy – one is selling one of the blocks with a DA, the other without a DA. The margin before interest on one of the feastudys is $101,021 and on the other is $154,045. BUT the IRR's are 33.31% and 14.41% respectively.
What am I missing?? The profit margin is much higher in the second scenario and yet this is not reflected in the IRR. Apart from a higher amount of GST and selling fees on the second deal, all other costs are the same.
I am not familiar with that software – are you changing the amount of money put into the deal somewhere?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Irr is time dependent. Make sure that your interest rates are consistent ie annualised rate or monthly rate etc.
Alternatively plug your cashflow numbers into excel & run a dcf & irr.
Thanks Terryw, no I wasn't that was what was confusing me!
Scott – I think this is what has happened.
So when doing a feasibilty study do you look for the IRR to be over 20% or the MDC over 20% or both??
you’d want both to exceed your risk + interest rate etc (discount factor) – this may be higher or lower than 20% depending on your circumstances.
What you’re after is some consistency between your 2 methods.
Thanks Scott.
I'm working on a deal that has an IRR of 22.42% and an MDC of 43.80% – is that fairly typical?
It would be about $1.6m down with a profit of around $730K. Just trying to work out what good deals look like.
Scott No Mates wrote:Irr is time dependent. Make sure that your interest rates are consistent ie annualised rate or monthly rate etc. Alternatively plug your cashflow numbers into excel & run a dcf & irr.I am not sure what type of software you were using either. I am using a free Real Estate analysis software at http://RealEstateAnalysisFREE.com . It will calculate you correctly NPV and IRR and there is also description of both indicators.
Simply said though, IRR is a discount rate of an investment generating 0 NPV. I prefer to use NPV rather than IRR in my calculations, but in that case you have to figure out the discount rate suitable for your investment.
Hopefully it's little bit more clear. Check out that software though, I found it really helpful for my real estate analysis and it's free. ;o)
Xarp – the Internal Rate of Return is defined as 'the discount rate which causes the Net Present Value to equal zero'. The two terms are not mutally exclusive. If you use a zero discount rate (ie no discounting for time effects) you will get your gross return, when you show zero return (ie NPV=0) then then you will have your rate of return for the project (whether it is a monthly RR or annualised RR). You just have to build your cashflow into the model accordingly.
You cannot just use NPV without an understanding of what it is or how it is determined. If you have determined your discount factor, ie risk, the NPV reflects the return after the risk has been calculated. By analysis, you will get used to understanding why the IRR becomes important as you determine how risky a project will be with regard to returns generated.
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