SpatialAnalysis
New member
- Joined
- Jun 12, 2020
- Messages
- 5
Hello all. I'm trying to understand if I am applying a correct definition in usage of an IRR formula within Excel. Although I know the formula is working, I need clarification on whether the application of the formula is the correct statistical/mathematical formula to use in such a (business) situation. The requirement I have is to calculate an up front payment to secure an early termination of a (5 year) commercial property lease.
There are three elements to consider:
1) an up front premium payment (in Year 0). This constitutes a surrender payment to exit the commercial lease, plus the cost of fees for legal expenses to execute this deal process
2) the on-going commercial lease payments (rent) over subsequent years - the cash flow series
3) final payments that would have to be paid at the end of the commercial lease (legal fees, dilapidation costs and fees) at the end of Year 5
(for avoidance of doubt, the end final cost payments are provisioned for in an accounting sense. Additionally, the legal fees paid as part of the Year 0 exit premium are the same legal fees that are provisioned for and would have been paid at the end of Year 5)
So my formula is calculating the IRR of
IRR(-Premium,Year 1, Year 2, Year 3, Year 4, Year 5, Final Costs/Fees)
My uncertainty is whether or not an Internal Rate of Return should be measuring the up front payment cost against a cash flow series AND additional end final costs?
Does this comply with the correct application of financial-maths in such a scenario, or should I be using a different formula?
From what I have read, the IRR seems to be the correct formula to use for calculating a measurement of up-front (exit premium) costs versus a cash flow series. It's the end final (provisioned) costs, in addition to the cash flow series, that I'm unsure about.
Thanks all!
There are three elements to consider:
1) an up front premium payment (in Year 0). This constitutes a surrender payment to exit the commercial lease, plus the cost of fees for legal expenses to execute this deal process
2) the on-going commercial lease payments (rent) over subsequent years - the cash flow series
3) final payments that would have to be paid at the end of the commercial lease (legal fees, dilapidation costs and fees) at the end of Year 5
(for avoidance of doubt, the end final cost payments are provisioned for in an accounting sense. Additionally, the legal fees paid as part of the Year 0 exit premium are the same legal fees that are provisioned for and would have been paid at the end of Year 5)
So my formula is calculating the IRR of
IRR(-Premium,Year 1, Year 2, Year 3, Year 4, Year 5, Final Costs/Fees)
My uncertainty is whether or not an Internal Rate of Return should be measuring the up front payment cost against a cash flow series AND additional end final costs?
Does this comply with the correct application of financial-maths in such a scenario, or should I be using a different formula?
From what I have read, the IRR seems to be the correct formula to use for calculating a measurement of up-front (exit premium) costs versus a cash flow series. It's the end final (provisioned) costs, in addition to the cash flow series, that I'm unsure about.
Thanks all!