The IRR Before Debt for the entire holding period is 66%, and the NPV Before Debt @11.00% is $187,762.

In this case 66% IRR is greater than the 11.00% discount rate, and that means if the initial investment in the beginning is increased by the $187,762 the IRR will be very close to the 11.00% discount rate (both numbers are rounded). The IRR is the discount rate that makes the NPV zero hence, if the IRR is exactly the same as the discount rate, the NPV would be zero (rounding means it is usually very close to zero). The IRR and the NPV use the same cash flows and the same process. The IRR simply runs lots of NPV's seaching for the discount rate that returns a NPV that is close to zero.

The IRR can be compared to the redemption yield of a bond, or the APY on a bank account.

Before Debt Cash Flows for IRR and NPV

MM/DD/YY	Cash Flow
01/01/2001	($2)
01/15/2001	($148,500)
02/15/2001	$4,200
03/15/2001	$4,200
04/15/2001	$4,200
05/15/2001	$6,867
06/15/2001	$6,867
07/15/2001	$6,867
08/15/2001	$6,867
09/15/2001	$6,867
10/15/2001	$6,867
11/15/2001	$6,867
12/15/2001	$6,867
01/15/2002	$74,400
02/15/2002	$6,985
03/15/2002	$6,985
04/15/2002	$6,985
05/15/2002	$6,985
06/15/2002	$6,985
07/15/2002	$6,985
08/15/2002	$6,985
09/15/2002	$6,985
10/15/2002	$6,985
11/15/2002	$6,985
12/15/2002	$6,985
01/15/2003	$83,822
02/15/2003	$7,612
03/15/2003	$7,612
04/15/2003	$7,612
05/15/2003	$7,612
06/15/2003	$7,612
07/15/2003	$7,612
08/15/2003	$7,612
09/15/2003	$7,612
10/15/2003	$7,612
11/15/2003	$7,612
12/15/2003	$7,612
01/15/2004	$91,345
02/15/2004	$7,748
03/15/2004	$7,748
04/15/2004	$7,748
05/15/2004	$7,748
06/15/2004	$7,748
07/15/2004	$7,748
08/15/2004	$7,748
09/15/2004	$7,748
10/15/2004	$7,748
11/15/2004	$7,748
12/15/2004	$7,748
01/15/2005	$92,975
02/15/2005	$7,893
03/15/2005	$7,893
04/15/2005	$7,893
05/15/2005	$7,893
06/15/2005	$7,893
07/15/2005	$7,893
08/15/2005	$7,893
09/15/2005	$7,893
10/15/2005	$7,893
11/15/2005	$7,893
12/15/2005	$7,893
Sale information not included with report.

All the IRR's and NPV's are computed on a monthly basis using the XIRR and XNPV process which is designed to handle irregular cash flows. To verify the IRR or NPV a spreadsheet program like Excel, Google Spreadsheets, Matlab, etc. will need to be used, because most financial calculators are not able to compute irregular dates and cash flows like the table shown.

Here are links to other descriptions of XIRR and XNPV:

• Excel XNPV Description
• Excel XIRR Description
• Google Spreadsheet XNPV Description
• Google Spreadsheet XIRR Description
• MATLAB XIRR (Internal rate of return for nonperiodic cash flow) Description

Directions for XIRR/XNPV Excel Verification

1. Open Excel and try to insert function/financial/XIRR or XNPV
2. If the XIRR or XNPV is not there, select Tools/Add-ins, and add the analysis toolpak.
3. Copy and paste the cash flows shown into excel. If the paste does not go into separate columns try a paste special as text.
4. Insert the function/financial/XIRR or XNPV and highlight the dates, and cash flows as directed by the function.

How is a monthly IRR or NPV different from a Yearly IRR or NPV?

A Yearly IRR assumes that there is one total Cash Flow amount each year. If you are using an End-of-Period Convention, that Cash Flow is assumed to occur at the end of the year. Using this method, for example, a 30 year 12% mortgage evaluates to a 12% IRR for the lender. Most bankers know this is false, and they will consider the fact that the payments are received each month rather than at the end of the year, and correctly calculate that their IRR (Lender's Yield) on the mortgage is 12.68%. It is easy to correct for this calculation deficiency (since the monthly payment is always the same) by using a "Mid-Year Convention" which assumes that the annual cash flow occurs at the mid-point of the year involved. Using this convention, the computed Yearly IRR for the 12% mortgage returns to the (correct) 12.68%.

For the Mid-Year Convention to be accurate in computing IRR and NPV, however, the monthly cash flows must all be equal. This is almost always false with real estate investments, and in some cases it is grossly false. Consider development or other capital spending items such as rehabilitation. Think of the cash flow effect of re-financing or monthly draws on a development loan. Consider that leases end --- and their renewals (or new tenants) may involve Vacant Periods, Free Rent, Tenant Improvements and Commissions, all of which do not occur in convenient annual time frames. These and other events combine to assure that the monthly cash flows for real estate investments are and will be unequal. In turn, Yearly IRR and NPV calculations are almost always inaccurate, and sometimes grossly inaccurate.

For these reasons, competent real estate analysis software must compute monthly cash flows and compute the IRR and NPV measures on a monthly basis if those measures are to be accurate. Since these measures are continuously used in practice to compare and decide between real estate (and other) investments, accuracy is mandatory if proper decisions are to be made. In recognition of this, Excel (for example) corrected it's previous (until 1996) Yearly IRR and NPV routines with new XIRR and NPV routines that expressly consider the date of a cash flow rather than assuming they occur a year apart. Other spreadsheet programs such as Google and MATLAB also now offer this capability.