The project IRR takes as its
inflows the full amount(s) of money that are needed in the project. The
outflows are the cash generated by the project. The IRR is the internal rate of
return of these cash flows. The calculation assumes that no debt is used for
the project.
Equity IRR assumes that you use debt for the
project, so the inflows are the cash flows required minus any debt that was
raised for the project. The outflows are cash flows from the project
minus any interest and debt repayments. Hence, equity IRR is essentially
the “leveraged” version of project IRR.
Generally Equity IRR is more than project IRR and
the equity IRR will be lower than the project IRR whenever the cost of debt
exceeds the project IRR.
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| Equity IRR and Project IRR |
NFF provides loans, financial consulting and growth capital services to help nonprofits improve their capacity and strengthen their communities. Milton Barbarosh
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ReplyDeletecalculation wise is fine for project IRR to be lower than equity IRR, but can you give more explanation why is that
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