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] Find out more
[edit] Related articles on Designing Buildings Wiki
Featured articles and news
Do you understand the different types of stone and which ones you should use where?
Why a wellbeing strategy is vital for property managers.
An ECA briefing for members about the commercial implications of leaving the EU.
A crucial moment on any project - and fraught with danger.
The performance gap from a Northern Ireland perspective.
Book review: Buildings of protestant nonconformity.
Design and testing for health and wellbeing - free download from BRE.
Retention in construction contracts.
Campaign for the reform of cash retentions.
The key points for the construction industry and BSRIA's response.
How to make roads safer: the debate continues.