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
Clean indoor air for healthy living
Read about the measures that can be taken by individuals to protect and minimise exposure to outdoor sourced air pollution.
Government announces leaseholds on new-build houses will be banned.
Transport Secretary announces public consultation into London's funding of Crossrail 2.
Architecture of concert stages
Have a look at some of the most impressive concert stage designs of all time, including Pink Floyd, U2, Rolling Stones, and more...
What is the Home Quality Mark? Find out how it can help you when buying/renting a new home.
Business Secretary launches £246m Faraday Challenge to establish UK as world leader in battery technology.
Government announces new plans for regulations to improve safety and security awareness of drone users.
Read our introductory article to the various different types of fuel.
IHBC book review: Charles Barry’s monumental struggle to rebuild the Houses of Parliament.
Read about RSHP's British Museum extension which has been shortlisted for the 2017 Stirling Prize.
Read our introductory article to building a house extension.
More updates from DCMS about the large-scale testing of cladding systems and the number of buildings affected.
UandI secure resolution to grant planning consent for major new regeneration project.
It was the tallest structure in the world for 3,800 years, but to this day the exact construction techniques are a mystery.
Grenfell Tower articles updated daily
