Internal rate of return for property development
Calculating the Internal Rate of Return (IRR) of a project is a widely used method of assessing a potential project’s viability.
It is a similar calculation to Net Present Value (NPV) and Discounted Cash Flow (DCF) in that anticipated future income and expenditure are used to assess whether or not to proceed with a project. The IRR is the percentage which, when applied to future capital costs and receipts, results in a Net Present Value of £Nil.
If project 1 has an IRR of 12% and project 2 an IRR of 8% then project 1 would be selected to proceed as it has a higher IRR.
Usually the project IRR must exceed the cost of capital by an agreed amount so that the risk of proceeding is seen to be within acceptable commercial parameters. It can be seen, therefore that an accurate cash flow projection for a prospective project must be developed before an accurate IRR assessment can be made.
Because the IRR is expressed as a percentage per annum it can be used to assess the Yield of a particular investment.
Most spreadsheet packages have an IRR function which, when applied to a project model cash flow, will calculate the IRR for you.
--Martinc
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
Call for greater recognition of professional standards
Chartered bodies representing more than 1.5 million individuals have written to the UK Government.
Cutting carbon, cost and risk in estate management
Lessons from Cardiff Met’s “Halve the Half” initiative.
Inspiring the next generation to fulfil an electrified future
Technical Manager at ECA on the importance of engagement between industry and education.
Repairing historic stone and slate roofs
The need for a code of practice and technical advice note.
Environmental compliance; a checklist for 2026
Legislative changes, policy shifts, phased rollouts, and compliance updates to be aware of.
UKCW London to tackle sector’s most pressing issues
AI and skills development, ecology and the environment, policy and planning and more.
Managing building safety risks
Across an existing residential portfolio; a client's perspective.
ECA support for Gate Safe’s Safe School Gates Campaign.
Core construction skills explained
Preparing for a career in construction.
Retrofitting for resilience with the Leicester Resilience Hub
Community-serving facilities, enhanced as support and essential services for climate-related disruptions.
Some of the articles relating to water, here to browse. Any missing?
Recognisable Gothic characters, designed to dramatically spout water away from buildings.
A case study and a warning to would-be developers
Creating four dwellings... after half a century of doing this job, why, oh why, is it so difficult?
Reform of the fire engineering profession
Fire Engineers Advisory Panel: Authoritative Statement, reactions and next steps.
Restoration and renewal of the Palace of Westminster
A complex project of cultural significance from full decant to EMI, opportunities and a potential a way forward.
Apprenticeships and the responsibility we share
Perspectives from the CIOB President as National Apprentice Week comes to a close.