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MIT CRI M1U2 Notes Video 1 Transcript

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MIT CRI M1U2 Notes Video 1 Transcript

Uploaded by

hhziad
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Module 1 Unit 2 Notes Video 1 Transcript


DAVID GELTNER: Hi everyone. By this point in the course you should know how to
measure return on investment using the simple holding period return and time-weighted
returns. To test your understanding of these concepts, consider whether the following
statement is true or false:

QUESTION: An investor must know what the value of the asset is at both the beginning
and the end of each consecutive period of time in order to compute the simple holding
period return and the resulting time-weighted return over the whole span of time.

a. True

Correct, well done. An investor has to know the beginning asset value and ending
asset value in order to calculate each year’s yield, growth, and total return.

b. False

Incorrect. An investor has to know the beginning asset value and ending asset
value in order to calculate each year’s yield, growth, and total return.

DAVID GELTNER: It is often difficult to compute the time-weighted return for investments
in the private property market, as properties are usually not appraised on a frequent basis.

This is one reason why we use a different kind of multi-period return measure, the internal
rate of return, or IRR in short, for direct investments in individual properties. The IRR is the
discount rate at which the present value of net cash inflows is equal to the initial up-front
investment amount (or the initial cash outflow). To compute the IRR, you only need to know
the net cash flow from the property for each period, and the asset value at the beginning
and overall end of the whole span of time. You don’t need to know the asset value at the
beginning and end of each period.

Let’s look at an example.

This example follows on from the example you used when learning how to calculate time-
weighted returns.

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In the cell underneath the last cash flow, enter the formula =IRR and a bracket, or
parentheses. Now select the range of cells that include cash flow amounts, and press
Enter. This gives you the internal rate of return for the project which, in this instance, equals
5.82%. If you do not get the same number, check that the formatting of the cell you are
calculating the IRR in is set to show two decimals. Note that you don’t have to enter the
cash flows vertically in a column; you can enter them horizontally in a row as well.

To recap, all you need to calculate the internal rate of return of an investment is the initial
value of the investment, the cash flows during the course of the investment, and the value
of the investment at the end. This provides you with enough information to measure the
performance of the investment, and is the traditional method used to measure the returns
to individual real estate investments. Refer back to the notes included in this unit to learn
more about the internal rate of return.

In the example used in this video, the investor had all the cash flow information available,
as the calculation was performed ex post. How do you think investors can estimate cash
flows in order to calculate the IRR ex ante?

If you’d like to go over any of the sections again, just click on the relevant button.

© 2018 MIT SA+P


All Rights Reserved

Tel: +1 224 249 3522 | Email: [email protected] | Website: getsmarter.com

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