Sometimes calculating project IRR and equity IRR can be tricky, and in this post we will discuss the reasons for the same.
The internal rate of return (IRR) can be defined as the rate of return that makes the net present value (NPV) of all cash flows equal to zero. In a previous post I have discussed the basic concepts and calculation of IRR and NPV. If you want to refer back, click here for the IRR-NPV post.
Calculation of the internal rate of return considering only the project cash flows (excluding the financing cash flows) gives us the project IRR.
Consider a project with construction cost of $ 1,000,000 and annual rental income of $ 120,000. Assume the property will be sold in the 10th year for $ 1,607,023. You can construct the project cash flows and calculate the project IRR by using the Excel IRR formula. You can also download the excel spreadsheet for this calculation. The download link is at the end of this post.
