Mr Mike Patrick

The purpose of this paper is to discuss the use of the internal rate of return (IRR) as a principal measure of performance of investments and to highlight some of the weaknesses of the IRR in evaluating investments in this way.

Design/methodology/approach

This Education Briefing is an overview of the limitations of the IRR in making capital budgeting decisions. It is illustrated with a number of counter-intuitive examples.

Findings

The advantage of the IRR is that it is, on the surface, a wonderfully simple benchmark. One figure that tells a story. But, the disadvantage is that if used in isolation the IRR can give misleading results when used to assess investment proposals.

Practical implications

The IRR should be used in conjunction with other analyses to appraise projects, so that the user can determine its veracity in the context of other benchmarks. This context is particularly important when assessing investments with unusual cash flows.

Originality/value

This is a review of existing models.

– The purpose of this paper is to explain the derivation of the years purchase (YP) quarterly in advance formula.

Design/methodology/approach

– This education briefing is an overview of the YP quarterly in advance formula in the context of the UK real estate market.

Findings

– Whilst arithmetically more precise than market practice it lacks a compelling reason to be adopted in its place.

Practical implications

– Understand the effect on stated yields of using annually in arrears, rather than quarterly in advance, assumptions.

Originality/value

– This is a review of existing models.

– The purpose of this paper is to provide a summary, with examples, of the various types of yields that are used as benchmarks in the UK for property and finance.

Design/methodology/approach

– Simple examples explain the differences between the various benchmarks used for different assets.

Findings

– The paper highlights the differences between the various benchmarks for different assets.

Research limitations/implications

– This is an Education Briefing.

Originality/value

– The paper provides a summary of the various types of yields that are used as benchmarks in the UK for property and finance.