How to come up with a "Project IRR"

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Permalink Reply by Ash on September 23, 2009 at 6:31am

when i have initial investment made up of equity(60%) and debt(40%) then we take total of initial investement for calculating IRR.....

If that is true then interest on loan should be considered.....

Am i right ?

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Permalink Reply by Jimi on September 23, 2009 at 6:55am

Hi Ash,

You are calculating Project IRR, and for the purpose of it you will be considering Pre tax, pre financing cash flows.

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Permalink Reply by Sachidanand (Sacha) Singh on September 23, 2009 at 6:56am

Project analysis should not consider how the project is financed. Your project may be financed by 40% debt but some other person may decide to finance the same project with more or less debt.

While analyzing a project, even when you finance the project by issuing debt, you do not subtract interest payments (or principal repayments) from cash flow just as you do not subtract the debt proceeds from the required investment.

This is done to keep the investment decision separate from the financing decision. After you have calculated NPV (or IRR) of the project, then you can undertake a separate analysis of financing. Financing decisions interact with investment decisions – extent of debt affects cost of equity as well and you may face a value-maximizing problem at that stage. For the present, i.e. just to check on the project, treat it as if it were all equity financed – even if there is some debt.

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Permalink Reply by Glenn McGuire on January 21, 2010 at 2:17pm

Agreed you need to keep the investment and financing decision seperate.

A further question on the pre post tax scenarios.

If I have a project that can be based in a tax paying country or a tax exempt country, do I need to adjust my WACC to remove the tax shield in the analysis of the tax exempt country? ie to compare these decisions do I use different WACCs?

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Permalink Reply by oteng sebonego on January 21, 2010 at 9:26am

In summary-does this mean that project IRR is based on Free cash flows WITH interest expense?

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Permalink Reply by Dipu James on April 3, 2009 at 4:53am

The major difference being the debt component interest and the principal repayments

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Permalink Reply by Ankit Arora on April 17, 2009 at 3:44am

The project IRR is very simple to calculate.
For any project the cash flows in it will be Operating Rev - Operating Cost (Incl. the maintenance expenses) or in other terms it is the pre financing pre tax cash flows.
Just use the XIRR function as it gives the accurate results instead of IRR.

Thanks,
Ankit

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Permalink Reply by Sachidanand (Sacha) Singh on April 17, 2009 at 5:30am

I thought it was post tax cash flow with all equity funding assumption.

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Permalink Reply by shekhar on May 27, 2009 at 6:54am

I Think PIRR would always be post tax secondly when we add back Interest tax shild for the said interest needs to be reduced from total inflow which will give the correct PIRR

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Permalink Reply by Huzefa on January 11, 2010 at 9:09am

Hi,

I am calculating a project IRR & equity IRR for a real estate project under construction. I've calculated the project irr = sales from residential sales - const expenses - taxes paid (A). From A - change in debt (addition & repayment) leads to equity IRR.

Now, my problem is for calculating project IRR cash flows start from negative to positive to negative in the final yrs. IRR is not accurate in such a scenario is my understanding. is there any way to resolve this?

for equity irr, the cash flows start from positive to negative.

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