IRR.....What is it?

[Logan Jorns]

I’m currently reading “What Every Real Estate Investor Needs to Know About Cash Flow...” and just finished the section about the relationship between IRR & NPV. I don’t feel I have a good grasp on this concept and have been looking online for other explanations, but it still has yet to click. Could anyone who understands this concept please help me out? Cheers!

[James C.]

Logan, 

I'll take a stab at this. 

NPV is the current value of all future cashflows discounted to the WACC ( weighted average cost of capital,  or the interest rate that you borrow at). NPV gives you a dollar figure that represents the increase  (or decrease ) in cashflow for the term of the investment. 

IRR is the percentage expression if that cashflow. It's done by setting the NPV to zero and solving for the WACC.

If the IRR exceeds the WACC, accept the project as NPV > 0, i.e. positive cashflow. If the NPV > 0 i.e. (NPV - acquisition cost) is positive, then the project should be accepted.

Hope that helps. 

Good luck, 

Jim