FINANCIAL INFO

You often hear, "it's a great investment", but is it really?

How does one even measure if an investment "is great"? The Internal Rate of Return as defined below is one way of measuring the "greatness".

When evaluating the return on a Real Estate Investment, the annual net income is a component. So is the future depreciation or appreciation of the Asset. This involves predicting the Future which is inherently difficult to do. Example, the decline in oil prices
of more than 55% from early 2014 till early 2015.

Definition of "Internal Rate Of Return - IRR"

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.
IRR is sometimes referred to as "economic rate of return (ERR)."

The following is the formula for calculating NPV:
 

where:
Ct = net cash inflow during the period
Co= initial investment
r = discount rate, and
t = number of time periods