Internal Rate of Return (IRR)
Internal rate of return (IRR) is a metric used in capital budgeting measuring the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.
- A hurdle rate is the minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, the riskier the project, the higher the hurdle rate.n capital budgeting, projects are evaluated either by discounting future cash flows to the present by the hurdle rate, so as to ascertain the net present value of the project, or by computing the internal rate of return (IRR)
- on the project and comparing this to the hurdle rate. If the IRR
- exceeds the hurdle rate, the project would most likely go ahead.
- For example, a company with a hurdle rate of 10% for acceptable
- projects, would most likely accept a project if it has an internal rate
- of return of 14% and does not have a significantly higher degree of
- risk. Alternately, discounting the future cash flows of this project by the hurdle rate of 10% would lead to a large and positive net present value, which would also lead to the project's acceptance.
- The discount rate also refers to the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. The discount rate in DCF analysis takes into account not just the time value of money,
- but also the risk or uncertainty of future cash flows; the greater the
- uncertainty of future cash flows, the higher the discount rate.
Risk Free Rate
- The risk-free rate of return is the theoretical rate of return
- of an investment with zero risk. The risk-free rate represents the
- interest an investor would expect from an absolutely risk-free
- investment over a specified period of time.
Opportunity cost of capital
The opportunity cost of capital is the incremental return on investment that a business foregoes when it elects to use funds for an internal project, rather than investing cash in a marketable security. Thus, if the projected return on the internal project is less than the expected rate of return on a marketable security, one would not invest in the internal project, assuming that this is the only basis for the decision. The opportunity cost of capital is the difference between the returns on the two projects.
The absorption rate is the rate at which rentable space is filled. Gross absorption is a measure of the total square feet leased over a specified period with no consideration given to space vacated in the same geographic area during the same time period. Net absorption is equal to the amount occupied at the end of a period minus the amount occupied at the beginning of a period and takes into consideration space vacated during that same period as well as newly constructed space. Based on our detailed survey results, absorption rates have been meager and we are all impatiently waiting for the good market to return!
The vacancy rate is the numerical value calculated as the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time. It is the opposite of the occupancy rate, which is a calculation based on the percentage of units in a rental property that are occupied.
as space users are willing to pay more real dollars per year for use of the same location. The real cost of building structures does not usually increase over time or from one site to another. However, if demand keeps growing in the face of fixed land supply, the real price of site acquisitions will rise, and this will add to the cost of development
The level of rent that is just sufficient to stimulate profitable new development in the market is called the replacement cost level of rent, and this tends to be the long run equilibrium rent in the market