IRR-NPV Definitions

IRR-NPV Definitions - The net present value of this income...

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INTERNAL RATE OF RETURN (IRR ) The rate at which the discounted returns from an investment equals the cost of the investment. Internal rate of return, a technique used to compare various investment alternatives, is also known as discounted cash flow. NET PRESENT VALUE (NPV) The value of an income stream and/or reversion at a given discount rate, less the original investment cost . For example, assume an income-producing building can be purchased for \$100,000. The building is expected to generate the following amount of net income: (1) End of Year 1, \$22,000; (2) End of Year 2, \$22,000; (3) End of Year 3, \$25,000; (4) End of Year 4, \$20,000; (5) End of Year 5, \$20,000. Also, at the end of the fifth year the building can be sold for \$80,000.
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Unformatted text preview: The net present value of this income stream and reversion, assuming a 16 % discount rate, would be calculated as follows: Present Value of End of Year Future Future Cash Flows, each Cash Flows Cash Flows Discounted at 16 percent EOY 1 \$ 22,000 \$ 18,965.52 EOY 2 22,000 16,349.58 EOY 3 25,000 16,016.44 EOY 4 20,000 11,045.82 EOY 5 (20,000 + 80,000) 100,000 47,611.30 \$ 109,988.66 Now, subtract the original investment of \$100,000 from present value sum of the future cash flows, each one discounted at 16 percent, to arrive at the Net Present Value of \$9,988.66. (\$109,988.66 – 100,000.00 = \$9,988.66) Information adapted from brochure entitled The Internal Rate of Return in Real Estate Investments...
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This note was uploaded on 01/11/2012 for the course CM 426 taught by Professor Markhutchings during the Winter '12 term at BYU.

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