Levered vs unlevered IRR: formulas and worked examples

What is the difference between levered and unlevered IRR?

Use unlevered IRR to compare the underlying projects on a consistent cost and tax basis. Use levered IRR to assess the cash paid and received by equity under a particular financing structure. Neither answers whether the project can meet every payment when it falls due.

For a single equity investor with no retained cash, the period-by-period bridge is: equity cashflow = project cashflow + debt drawn − debt principal repaid − interest paid − financing fees. A negative result is an equity contribution; a positive result is a distribution. If cash is retained, restricted or allocated through a waterfall, model those steps before calculating the investor's return.

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%.

Reproduce the calculation in Excel

For one outflow followed by one receipt exactly n years later, annual IRR = (final receipt ÷ initial investment)^(1 ÷ n) − 1. The base project calculation is (13 ÷ 10)^(1 ÷ 2) − 1. The equity calculation is (6.04 ÷ 4)^(1 ÷ 2) − 1. This shortcut does not apply to a development with interim draws, costs or distributions.

To reproduce the two-year case with Excel IRR, enter the annual project series −10, 0, 13 in cells B2:B4 and the annual equity series −4, 0, 6.04 in C2:C4. Use =IRR(B2:B4) and =IRR(C2:C4). Keep the zero in year one: deleting it shortens the assumed holding period to one year.

For actual transaction dates in A2:A4, use =XIRR(B2:B4,A2:A4) and =XIRR(C2:C4,A2:A4). XIRR uses a 365-day year, so dates spanning a leap day can differ slightly from the equal-year example. For monthly periodic IRR, annualise with (1 + monthly IRR)^12 − 1. State the convention beside the result.

Sources: Microsoft: XIRR function; Microsoft: IRR function

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.

Test a delay even when the sale price holds

Keep the 13 million exit receipt, but move it from year two to year three. Assume the same 6 million loan can remain outstanding for the extra year at 8% simple annual interest. Interest rises from 0.96 million to 1.44 million, leaving 5.56 million for equity. Project IRR falls to 9.14% and equity IRR to 11.60%. The project multiple stays at 1.30 times while the equity multiple falls to 1.39 times.

This isolates timing and interest. A real delay can also change operating income, site costs, extension fees, covenants and the availability of refinancing. Do not assume the lender will extend. Review the debt maturity date and peak funding requirement alongside the return figures.

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.

Apply the distinction to an office acquisition

Follow a complete acquisition with AED 12m of interest-only debt, annual income and principal repaid at sale. The interactive office example separates property IRR from equity IRR across four recorded Feasly calculations. Compare vacancy and exit yield, then inspect the cash flows behind the result.

Use Feasly’s investment underwriting workflow to review acquisition, income, debt and exit assumptions together. The calculation engine page explains how inputs and calculation results relate.

Sources: Feasly: Explore the interactive office underwriting example; Feasly: Feasly investment underwriting; Feasly: Feasly Calculation Engine