I am doing a course in real estate and I am currently calculating IRR using different methods. Namely, the reinvestment rate method, the safe rate method and the borrowing rate method. Do any of you know of these? I can’t find any additional material on these methods or examples. Sorry I know this does not relate to any of the sections for CFA.
This sounds less like a calculation of IRR and more a question of choosing benchmark to compare it to. Indeed, it sounds like reinvestment rate is an IRR result, and safe rate and borrowing rate are either numbers that he IRR has to beat, or they might be NPV methods that use some safe rate (hurdle rate) and borrowing rate (current borrow costs) to discount future cash flows to the present.
The varied methods for calculation IRR are usually about accounting for uneven cash flows to get around the problem that there can be multiple IRRs that set net NPV=0 when cash flows vary widely (particularly when there are positive and negative flows alternating at different times.
By contrast, NPV is the calculation that requires different rates as inputs. IRR gets compared to alternate investment options so might be compared to a hurdle rate (minimum required return) or borrow costs (on the principle that investments need to beat the cost of capital to be profitable).
I believe this is obscure real estate and/or academic stuff where you discount specific CFs (negative ones) using a given rate; for example discount the -$30K using the safe rate of 12%. Donald Trump math.
Basic difference from standard IRR is that you can define the reinvestment rates of positive cash flows in the interim. Standard IRR assumes all interim cash flows get reinvested at the same rate as final IRR, the MIRR allows you to change that assumption.
Presumably what you do is take interim cash flows, then compound them to the final period at the defined reinvestment rate, then add them all up and compute a CAGR on that final value.
(EDIT: Reading closer, it does compound positive cash flows at the reinvestment rate, but it also takes negative cash flows, computes the PV of them using the safe rate, then adds those them to the initial cash outlays. Then it computes a CAGR - compounded annual growth rate on the initial and final values).