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?
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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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