IRR Calculator: Project IRR and Equity IRR Explained

1. Short answer

The internal rate of return is the annual rate at which a series of cash flows discounts to exactly zero. Unlike ROI, it takes account of when money goes in and comes back.

Σ cash flow(t) ÷ (1 + IRR)^t = 0

There is no such thing as "the" IRR. BRIX Calc computes several, and they differ not in formula but in which cash flows go into the series. On the worked example below, a project IRR of 12.16% sits next to an equity IRR of 26.13%, for exactly the same scheme.

2. What IRR is, and what it is not

ROI divides profit by cost and ignores time. For IRR, time is the point: a euro returned after eight months is worth more than the same euro after three years, and IRR prices that difference into the percentage.

That makes IRR the only return figure that lets you compare projects of unequal length honestly. It also makes it sensitive to exactly that: stretch the duration without changing anything else and the IRR falls, even though the profit is identical to the cent.

What IRR is not: a universal number. Every IRR depends entirely on which cash flows you put in it. Put the loan in the outflow and you are measuring something other than if you leave it out.

The three variants in BRIX Calc.

The development dashboard shows the first two side by side, each under its own name. A single tile labelled only "IRR" would hide whether it describes the project or your money, and that is precisely the difference leverage makes.

3. The formula, component by component

All three variants solve the same equation. The difference is the series.

Project IRR is ungeared. Two flows: project costs excluding interest at the start, net sales proceeds at the end. Interest drops out, because it follows from your financing choice rather than from the project.

Equity IRR is geared. Your own equity at the start, sale proceeds less the debt outstanding at the end. If you amortise or pay interest periodically along the way, those payments enter as additional monthly outflows.

Exit IRR on a rental property is an annual series: your equity at t=0, then each year's cash flow after interest and after principal, with the net sale proceeds added on top in the chosen exit year. Sell after five years instead of ten and it is a different series, so a different number.

What BRIX Calc does. With exactly two cash flows the equation has a closed-form solution, and the tool uses it:

IRR = (proceeds ÷ equity)^(12 ÷ duration in months) − 1

That is not an approximation but the exact answer. As soon as intermediate flows appear, the engine solves the IRR iteratively over a monthly series and annualises the result. If that fails, for instance because the series changes sign more than once, it falls back to the two-point form above. That fallback is systematically more conservative: it does not process the intermediate payments, which depresses the percentage.

4. Worked example

The same development project as on the ROI page: a vacant office building converted into four apartments. The facility is interest-only and interest is rolled up until sale, so there are no payments in between. Figures in euros, on Dutch rules.

Project IRR = (931,000 ÷ 783,825)^(12/18) − 1 = 12.16% Equity IRR = (366,625 ÷ 258,825)^(12/18) − 1 = 26.13%

That third row teaches the most. The ROI of 18.33% is a total over eighteen months; the project IRR of 12.16% is per year. At a duration of exactly twelve months the two would coincide, were it not that the selling agent fee sits in the ROI denominator and not in the IRR cost base. That is not an inconsistency but a difference in what the two figures set out to measure.

Sensitivity. Run the same amounts over 24 months rather than 18 and the equity IRR falls from 26.13% to 19.02%. Not one euro changes: only the period over which the same money is tied up. In practice another six months of finance interest arrives on top, so the real drop is steeper. This is why delay hurts a development project more than people expect.

5. What counts as a good IRR?

Indicative ranges for small-scale residential conversion, based on customary combinations of gearing and duration rather than published transaction data:

Always compare an IRR against a project of similar length. On rental property there is a second caveat: the longer the horizon, the more the IRR leans on an assumption about future capital growth rather than on rent you can measure.

6. Three mistakes that distort the number

Setting project IRR next to equity IRR as if they were two scenarios. They are two sides of one project. Compare project with project and equity with equity; comparing across produces no error message, only a wrong conclusion.

Detaching the IRR from the period it was measured over. An exit IRR after five years and an IRR over the full term measure two different periods with two different terminal values. Never present them as "the same return, different end date".

Reading a high equity IRR as a better project. Leverage magnifies the return on your own money as long as the project makes a profit, and magnifies the loss as soon as it does not. The gap between 12.16% and 26.13% says something about your financing, not about the quality of the building.

7. Run your own numbers

Enter your own figures above and project IRR and equity IRR move side by side. To see what a different duration, repayment type or financing structure does, the BRIX Calc development calculator models the full cash flow series, and the rental calculator does the same for an exit year of your choosing.

8. Frequently asked questions

Why does BRIX Calc give two IRRs on a development project?

Because "the" IRR answers a different question depending on what you put in the series. A single label would hide whether you are looking at the project's return or your own money's, and on a financed scheme that difference is large: here 12.16% against 26.13%. The report that goes to a lender therefore shows the same two percentages as the screen.

Is equity IRR always higher than project IRR?

On a profitable financed project, usually yes, because the loan shrinks your equity while the whole profit still lands with you. On a loss-making project the same leverage works in reverse and magnifies the loss on your own money. A high equity IRR is therefore not a verdict on the building.

What is the difference between IRR and ROI?

Time. ROI divides profit by cost and gives a total percentage over the whole period; IRR converts that same result into an annual rate by weighting when the money moved. At exactly twelve months they amount to the same thing; shorter than a year the IRR is higher, longer than a year lower.

Why is there an exit IRR on rental property?

Because a rental property has no fixed end date. A development project is its own exit: there is one sale, and project IRR and equity IRR cover that question in full. A rental property keeps operating and you choose the year you sell. Exit IRR answers that specific question: what does this property return if I sell after the chosen number of years, including every cash flow in between.

How is the IRR solved when there are intermediate cash flows?

Iteratively, on a monthly basis, after which the monthly rate is annualised. No closed formula exists once there are more than two flows, which is also how a spreadsheet's IRR function works. If the series has no unambiguous solution, BRIX Calc falls back to the two-point form, and that percentage is more conservative than the real series.

What happens when a project makes a loss?

Mathematically an IRR still exists, but the number becomes unusable fast. A negative IRR of tens of percent says little more than "this went wrong", and where the equity is wiped out entirely there is no solution at all. In that case read the amounts rather than the percentage: project profit and proceeds after debt repayment tell a clearer story.