In this article you will learn more about the difference between Project IRR, Equity IRR and Payout IRR.
Meaning of IRR
The IRR (Internal Rate of Return) is used to calculate the return on investments.
How to calculate Project IRR
The Project IRR is is the key figure that provides information on the project-specific return. This means that this key figure does not take the financing structure into account and assumes 100 % equity financing. Since the debt capital is not taken into account in the IRR calculation, there is no leverage effect. Therefore, you can speak of an unleveraged IRR or unlevered IRR.
Equity IRR definition
In contrast to the Project IRR, the Equity IRR takes into account the debt financing. When financing projects with the addition of debt capital, the so-called leverage effect occurs and increases the return. This can also be named leveraged IRR or levered IRR. However, the return on equity in greenmatch is a theoretical figure, as it does not take into account distribution restrictions, which in reality usually occur.
How to use Payout IRR
As opposed to Equity IRR, the Payout IRR takes into account frequently occurring distribution restrictions. These include for example failure to meet the debt service coverage ratio (DSCR) or the minimum liquidity. The Payout IRR is usually lower than the Equity IRR due to the frequent occurrence of payout restrictions.
Depending on which factors have to be taken into account in the yield calculation, either the Project IRR, the Equity IRR or the Payout IRR should be used.
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