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When calculating project irr, do you include IDC?

Lets say the total construction cost is 100k and the IDC (interest during construction) is 10k.

When calculating project irr do you use -110k or -100k for year 0 input?

My colleague is saying anyhow we are going to use debt financing thus the project irr should be based on 110k, while I think if IDC is included then debt is included thus should only include pure construction cost of 100k.

Any thoughts?

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Project IRR, incl. debt and interests (accrued IDC in this case)
Equity IRR, excl. debt and interests

So the question is: What do you want for which purpose?
Regards,
Oscar

teddybk wrote:

Lets say the total construction cost is 100k and the IDC (interest during construction) is 10k.

When calculating project irr do you use -110k or -100k for year 0 input?

My colleague is saying anyhow we are going to use debt financing thus the project irr should be based on 110k, while I think if IDC is included then debt is included thus should only include pure construction cost of 100k.

Any thoughts?

As per IFRS/GAAP IDC is capitalized and becomes part of project cost being financed with debt and/or equity. Total cash outflow in year zero will be entire project cost inclusive of IDC. Therefore your friend is correct in taking 110 as project outflow to calculate project IRR.

Thanks for clarifying. Didn’t realize IFRS/GAAP categorizes that way.

To sum up, if we are eventually going to use debt, then project cost should include IDC.

But if we are not assuming debt, then project cost excluding IDC is the correct number. 

Is this correct?

If there is no debt then there is no interest so no IDC. Project IRR will equal to Equity IRR.

teddybk wrote:

… Didn’t realize IFRS/GAAP categorizes that way.

IAS 23 Borrowing Costs requires that borrowing costs directly attributable to the acquisition, construction or production of a ‘qualifying asset’ (one that necessarily takes a substantial period of time to get ready for its intended use or sale) are included in the cost of the asset. Other borrowing costs are recognised as an expense.