financial management rate of return

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financial management rate of return (FMRR)

A method of evaluating the performance of a real estate investment,FMRR is a modified version of the internal rate of return tool.FMRR uses two different rates for its calculations:(1) the cost of capital rate to discount future negative cash flows back to the present (in other words,what would it cost you to borrow the money to cover losses in future years?) and (2) a specified reinvestment rate for compounding future positive cash flows to the end of the projection period (in other words, what if you took your profits and reinvested them at a certain rate,how would they grow?)

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
If an investor has an accurate measurement of the return available from alternative investment opportunities, the FMRR would better state the real return on the individual investment property.
The aforementioned scenarios all show how the IRR and FMRR can vary with a single change in one of the variables at a time.
Finally, the actual scenario was analyzed while varying the holding period, reversion amount, and reinvestment rate (FMRR only) at the same time.
In tables a and b, the IRR method produces an average rate of return that is higher in the actual and spike scenarios, but a lower rate of return in the dip scenario compared with the FMRR method.
(a) Holding Period Actual Dip Spike IRR average return 11.8% 8.1% 10.8% IRR standard deviation 1.3% 1.2% 1.7% FMRR average return 11.4% 8.4% 10.7% FMRR standard deviation 1.1% 0.9% 1.4% Holding period in years: lowest value (5), most likely value (10), and highest value (15).
The multiple scenario randomly varies the holding period, sales price parameter, and reinvestment rate (FMRR only).
In this analysis, it was shown that the FMRR method produces results that fluctuate less with changes in the holding period and selling price parameter compared with the IRR method.
In the analysis that concentrated on a single variable, the FMRR varied less than the IRR under changing holding periods.
Although the FMRR method contains more complicated calculations than the IRR method, the prudent investor is not excused from using FMRR in an investment analysis.
Between the two rates of return, the FMRR method is more accurate and reliable than the IRR method in fluctuating scenarios such as those used in this article and should, therefore, not be overlooked as a useful tool for real estate investment.
Tarantello, "FMRR: A Programmable Calculator Implementation," The Real Estate Appraiser and Analyst (November-December 1979): 11-16.