Formula
Project IRR = discount rate that sets NPV of project cashflows to zero
WhereProject cashflows = revenue minus costs, period by period, ignoring debt drawdowns and repayments.
Why it matters
Project IRR isolates the underlying quality of the project from how it is financed. Two projects with very different equity IRRs can have similar project IRRs; the gap is the debt structure. ICs compare project IRR across deals to test underlying project quality.
Worked example
For a residential scheme with $26.2M net realisation and $24.1M of TDC over 30 months, the unlevered project IRR is approximately 7–8%, well below the levered equity IRR of ~18%. The gap is the work the senior loan is doing.
Related terms
Connected ideas in the glossary.
See it in action
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