IRR Sensitivity Analysis Template

[Kyle Mitchell]

Hi everyone,

I am looking for an IRR sensitivity analysis template, any suggestions on the best place to find one?

Thanks,

Kyle

[Bill F.]

Originally posted by @Michinori Kaneko:

TBH, IRR is probably not the greatest way to measure performance of real estate. this is because IRR assumes that you take proceeds from your investment and reinvest them in similar performing assets. You cant take a monthly cashflow and invest in another house because monthly cashflow is not enough to purchase a house. ROE or ROA is probably a better measure.

Another reason is because IRR is time sensitive analysis. If you have a large capex expense, whether you have that in Year 5 or year 10 makes a huge impact in your IRR return, where as most investors are averaging out the capex over the year (e.g. save 10% each month for capex). And guess what, these savings are saved where....? In a CD or savings account that generates 2% return (which brings me up to the first point).

Just my 2 cents.

You raise very valid points with about the implicit assumptions of the IRR calculation that I don't think get enough attention. Its particularly worrisome when you have a situation with a longer time horizon and meaningful FCF that spits out a 20+% IRR, since, like you said, the calculation assumes the money is reinvested at that high rate. Even smaller amounts compounded for a few years at 20+% can distort the true returns.

However, in no way shape or form can ROE/ROA begin to compare to a DCF calculation like IRR. They are snapshot in time calculations that simply don't account for TVM and intermediate non-regular cash flows. Plain as that.

As for your situation with a large expense that is saved for, the solution is adding a CapEx reserve amount that doesn't flow to FCF.

From my humble point of view, these calculations are not the final word on any investment, but rather tools to help us make decision that will growth our wealth. As with any tool, a saw, a computer, an idea, they have their strengths and weakness. Its up to us, the user, to understand the pros and cons of our tools and use them accordingly. In IRR's case, we have to understand that if a project has large cash flows early on (say from an operational value add then a quick refi) but longer hold time, then we need to use form other metrics to backstop our decision making process.

I find that MIRR and Financial Management Rate of Return both make up for this deficiency of IRR and a few others.

Thanks for the opportunity to nerd out!