To assess IRR risk via sensitivity analysis on exit cap rate and discount rate, which steps should you perform?

• A. Increase rent growth by 2% each year and keep other inputs constant.
• B. Vary exit cap rate and discount rate across ranges; recompute terminal value, IRR, NPV; present results in a tornado or spider chart.
• C. Only adjust exit cap rate while keeping discount rate fixed.
• D. Revalue the asset using replacement cost approach.

Answer: (B)

The idea being tested is how to quantify IRR risk by examining how sensitive the project’s returns are to two key inputs that drive terminal value and discounting. To do this properly, you vary both the exit cap rate and the discount rate across plausible ranges, recompute the terminal value, IRR, and NPV for every scenario, and then compare how much each input moves the results. Presenting these results in a tornado or spider chart helps you see which input has the bigger impact on IRR, guiding where risk may matter most. This approach is more informative than tweaking only one input or using an alternative valuation method, which wouldn’t specifically map the joint sensitivity of IRR to both exit cap and discount rate.