Internal Rate of Return (IRR) calculations are used to compare and evaluate the annual economic result of the cost of acquiring or creating an asset and subsequently selling the same asset. This is appropriate and reasonable for assessing the returns from assets which do not generate investable funds during the investment period.
The royalties issued by companies having revenues and using our approach provide income from the time of purchase. In the case of royalties structured as we recommend the royalty issuer is obliged to make payments to royalty investors at the time that revenues are received. In the structuring of royalties we recommend that royalty payments are distributed quarterly.
The royalty investor has the option of simply holding or spending the royalty payments received or of investing the periodic payments. To make the Royalty Rate of Return (RRR) calculation function as a measure of investor benefit, website calculator users set the Fixed Return (FR) to be used. My friend, Viktor Filiba, a senior software architect, has been very helpful in my creating the RRR.
Clearly, the RRR calculation which includes reinvested payments is always going to be higher than the point-to-point, cost-to-liquidation, standard IRR. The degree of positive differential is determined by the level of FR set by the calculator-user. If only a 5% FR is assumed for the remaining period of the royalty the RRR indicated benefit for the longer-term royalty investor will be truly significant.
The royalty investor’s ability to immediately benefit from the revenues received by the royalty issuer is one more reason why royalties are believed to be the better way of investing in privately-owned, revenue generating, companies.
We are in the process of creating a RRR website calculator, which will permit users to enter data and determine the RRR resulting from the achievement of the projected revenues and terms of the royalty. Once professional investors, ever-seeking a greater income and lower risk portfolio IRR, have available the RRR analytical tool, the demand for royalties issued by established companies should increase significantly.
Let me know, by clicking here
, if you would like to learn more and have access to the RRR website calculator.
Revenue Royalties REXRevenueRoyalties.com
will also interest those having the responsibility of investing for others, as well as better for themselves.
Arthur Lipper, Chairman, British Far East Holdings Ltd.
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