Discount Rate and Unlevered IRR
Question:
Working on a deal now.
Discount Rate: 7%
Unlevered IRR: 10%
Levered IRR 19%
Does this make sense logically, shouldn't Discount Rate and Unlevered IRR be pretty much the same?
IRR is the discount rate that make NPV of all future cash flows equal 0. IRR does not necessarily equal to or as same as discount rate. I rarely see discount rate on a real estate deal, mostly just unlevered and levered IRR.
If your fund has a hard target and limited funds (say its the last one or two investments in that fund) NPV is used using a discount rate equal to the required rate of return.
wtf? you're a "2nd year analyst" and you're asking this question??
Exactly. I had to know this shit to land my first internship back in the day.
I don't think you understand my point.
When I do an IRR sumcheck on my ULIRR cash flow there is a spread between the discount rate.
Logically the two should match, but for the life of me I cant see an issue in my model. Is there any reason a variance between the two would occur?
I'm assuming you're calculating your IRR off the cash flows.
How are you calculating your discount rate of 7%? Why are you calculating a discount rate?
There is no logical reason, this is just a user input error. Try running a =NPV calc on both of them using each rate and see which one gives you a NPV of zero.
(-: thanks all set
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