Sage-Tips

When can equity IRR be lower than project IRR?

In that post we considered a simple project with one year gestation period and concluded that the equity IRR will be lower than the project IRR whenever the cost of debt exceeds the project IRR. We noted that it is the cost of debt and not the weighted average cost of capital, which impacts the equity IRR.

Is return on equity the same as IRR?

Simply put, ROE is the total amount of return that shareholders, as a group, receive on their original investment. IRR, in contrast, shows the annualized return of an investment over any period of time.

What is an equity IRR?

Equity IRR means the internal rate of return on equity investment of the project based on projected/actual cash flows during the Concession Period.

Why is a higher IRR better?

Essentially, the IRR rule is a guideline for deciding whether to proceed with a project or investment. The higher the projected IRR on a project—and the greater the amount it exceeds the cost of capital—the more net cash the project generates for the company. Generally, the higher the IRR, the better.

Can equity IRR be higher than project IRR?

As Equity IRR represents the degree the returns of a project to the providers of equity capital, i.e. Cost of Equity, which is higher than WACC, for a given set of computation, Equity IRR is always higher than Project IRR, for profitable investments.

Why would return on equity be high?

A high ROE suggests that a company’s management team is more efficient when it comes to utilizing investment financing to grow their business (and is more likely to provide better returns to investors).

What does a high return on equity mean?

Return on Equity Explanation (ROE) It tells common stock investors how effectively their capital is being reinvested. For example, a company with high return on equity (ROE) is more successful in generating cash internally. Thus, investors are always looking for companies with high and growing returns on common equity.

What is blended equity IRR?

Blended equity IRR is the return to the combined cashflow. It is the return taking both the net cash flow to pure equity and net cash flow to shareholder loan.

How do you increase IRR?

IRR is a property’s rate of return on each dollar invested, for each time period it is invested in. Because of its reliance on the timing of cash flows, IRR can be manipulated to appear to be higher by shifting the timing of cash inflows or shortening the period over which they occur.

Is a higher IRR good or bad?

Keep in mind that IRR is not the actual dollar value of the project. It is the annual return that makes the NPV equal to zero. Generally speaking, the higher an internal rate of return, the more desirable an investment is to undertake.

Is it better to have a higher NPV or IRR?

Whenever an NPV and IRR conflict arises, always accept the project with higher NPV. It is because IRR inherently assumes that any cash flows can be reinvested at the internal rate of return. The risk of receiving cash flows and not having good enough opportunities for reinvestment is called reinvestment risk.