Most IRR models mishandle the exit.

At exit, they do this:
• Take the final year’s rent
• Apply an exit yield
• Call the result “the exit value”

That reverses causality.

The exit value is not created by a yield.
It is created by the Present Value of the future cash flows at that point in time, discounted at the required or Target Return implied by the market conditions then in force.

The correct order is:
1. Specify cash flow assumptions
2. Assess the income security and asset-level risk arising from those cash flows, and determine the required or Target Return consistent with market pricing of that risk
3. Derive Present Value

Only after that does an exit yield appear. And when it does, it is an output, not an input. It is the rate that reconciles the assumptions and income security embodied in the cash flows with the implied price.

Applying an exit yield directly to rent skips the logic and hard-codes the answer. It forces the yield to do work that should instead be done by explicit cash flow assumptions and the required return consistent with the income security they imply.

If you are using an exit yield to generate value, you are not forecasting price.
You are assuming it.

That is not insight. It is reversed logic.

A coherent model must derive the exit value from explicit market assumptions and the required return consistent with the income security they imply, not smuggle them in through changes in the yield. Exit yields should reconcile those assumptions with price. When they are used to create price, the logic has already been reversed.

The question is not what exit yield you used.
It is what assumptions you think it represents.

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