What to take into your next appraisal
- Keep project and investor cashflows in separate schedules.
- Pair IRR with a multiple and the actual cash amounts.
- Test leverage under a lower exit value before treating it as an improvement.
Use matching boundaries
A meaningful comparison starts with the same asset, programme and operating assumptions. The unlevered schedule includes acquisition, development, operation and disposal cashflows. The equity schedule adds the financing arrangements and isolates investor cash. State whether taxes are included and whose tax position is represented.
RICS development valuation guidance distinguishes financing treatments. Microsoft's XIRR documentation explains returns for dated, irregular cashflows. Select the return method after defining the cashflow rather than using a formula name to decide which payments belong in it.
Sources: RICS: Valuation of development property; Microsoft: XIRR function
Follow an invented two-year investment
The project costs 10 million today and returns 13 million exactly two years later, with no interim cashflows. Its total profit is 3 million, multiple is 1.30 times and annual IRR is the square root of 1.30 less one, or 14.02%.
Now assume 6 million of debt at acquisition, 8% simple annual interest, and principal and all interest paid at the two-year exit. Interest is 0.96 million because it does not compound under this example agreement. Equity contributes 4 million and receives 13 − 6 − 0.96 = 6.04 million. Equity multiple is 1.51 times and annual IRR is 22.88%.
| Metric | Project before debt | Equity after debt |
|---|---|---|
| Initial outflow, million | 10.00 | 4.00 |
| Exit inflow, million | 13.00 | 6.04 |
| Cash multiple | 1.30× | 1.51× |
| Annual IRR | 14.02% | 22.88% |
Run exactly the same loan through a loss
If project exit receipts fall to 9 million, the debt obligation remains 6.96 million under the stated assumptions. Equity receives 2.04 million. The project multiple is 0.90 times and annual IRR is −5.13%; the equity multiple is 0.51 times and annual IRR is −28.59%.
The loan has not improved the asset. It has concentrated the residual outcome in a smaller equity investment. At still lower values, equity proceeds can be zero and creditor losses or guarantees become relevant. Do not allow a spreadsheet distribution to become negative without specifying whether it represents a further equity contribution or an unpaid creditor balance.
Explain what the multiple cannot tell you
A 1.51 times multiple over two years is very different from the same multiple over five years. Likewise, an early distribution followed by a later equity call changes IRR without necessarily changing total proceeds. Preserve dated cashflows when comparing proposals with different construction or disposal programmes.
Multiple sign changes can make an IRR ambiguous or produce more than one mathematical solution. Show NPV at a stated hurdle, gross contributions and distributions alongside IRR. Treat solver errors and missing values as review exceptions, not zero returns.
Make the reconciliation visible
The investment paper should bridge project receipts to debt principal, interest, fees, taxes and investor distributions. State whether equity multiple is gross or net of management fees and promote. Define whether returned capital can be recalled. These details matter when comparing a project appraisal with a fund-level performance figure.
A useful validation starts with zero debt: the equity cashflow should then match the project cashflow on the same cost and tax basis. Next add only debt principal, then interest and fees. This staged check makes accidental double counting much easier to find.
Sources and further reading
- Valuation of development property RICS
- XIRR function Microsoft
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