Q&A: Including capex in IRR calculation

Hello Kenny,

What about calculating IRR / NPV when the investment (CAPEX) is spread over several periods? Does it make sense to discount the CAPEX? I would think it doesn't, because if you commit CAPEX to project (solar PV plant in this case), you cannot use committed capital. So by discounting CAPEX you would overstate the IRR. I would even say it is reasonably to calculate FV of the CAPEX such CAPEX. What is your opinion and experience?` Overall, great course, thanks a lot! Vadim.

Thanks, Vadim.

There are a few parts to this.

Firstly, when calculating the Equity IRR, we generally do not include capex in the cashflows. We instead look at the cash from equity that is being invested to finance (either in whole or in part) that capex.

Note that in calculating Project IRR we would include capex (or rather total project costs) in the calculation.

Then as to whether you include the equity cash flow when it is spent, vs when it is committed, I'd say that's an economic choice for the investor. Most of the time we see sponsors/investors including the equity cash flow when it's disbursed, and we would tend to do that by default. That's because there is benefit in delaying equity investment (say through the use of an Equity bridge loan).

If you included the equity cash flow when it is committed rather than when it's disbursed, it would not capture the IRR / NPV benefit of delaying equity investment.


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