A Tutorial on Partitioning Real Estate Investment Cash Flows Using the Internal Rate of Return

Much has been written on the use of the internal rate of return (IRR) as an investment decision-making criterion. In a 1977 survey article, Jaffe (1977) cited 1,188 IRR references and classified them into four categories: (1) tutorial, (2) calculations and multiple solutions, (3) alternative measures, models and computations, and (4) reinvestment, risk and discounting, and ranking. Because of the possibility of multiple solutions when cash flows turn negative, and of the inherent assumption that cash flows generated can be continuously invested elsewhere at the project IRR, the consensus is that the net present value investment decision-making criterion is superior, and that the IRR’s principal use should be for ranking investment alternatives.1