In this workout, we're being asked to calculate the internal rate of return for the project from the sponsor's perspective. Now, before we can go ahead and calculate the IRR, we need to do some work upfront, and that is we need to compute the equity contribution for the first five years of the project, which is during the construction phase years, and also when the project is not yet profitable. Now we're provided with a capital structure of 75% debt, 25% equity, and we're gonna use these assumptions to come up with our equity contribution in year zero. So we're gonna take the 40 debt balance and we're gonna divide it by 75%. That is of course the debt proportion, and that's gonna give us the total capital needed in year zero. We can then multiply this times 25%, and that is the equity contribution percentage. And that will give us the equity balance or the equity contribution in year zero. Now we can take this formula and we can copy this formula all the way right to year five. And as you can see, just like the debt balance grows, the equity contribution also grows. Now, what happens after year five is that my debt balance is actually declining, given that the project is now profitable, it's cashflow positive and it's able to pay down debt, but the equity contribution is gonna remain flat. So if I copy this formula to the right one more time, you will see of course that your equity contribution will decline given that it's 25% of the total capital. So to avoid the equity contribution declining, what we need to do is go to year one, and we need to wrap this formula inside a max function where we're gonna take the max of the actual equity balance for the year and the prior year equity balance.

Let me close that out, and you'll see now that when I copy this formula to the right, you'll see that the year five equity balance of 47.7 and the year six will remain flat or it will be the same value. So let's go ahead and copy this, right. And now you can see how the year five and six equity balances are the same. Now, of course, it is possible that the project can be profitable and they can pay down dividends at some point during its operational years. But in this case, we are assuming that there are no interim dividends. So the equity contribution remains at 47.7 during the entire 10 year timeline. Okay, now we are ready to compute the equity holders cash flows. So we can go down here and we can start in year zero and say, okay, What is the equity holder's cash flows for year zero, and that's gonna be the equity contribution of 13.3. Of course negative because it's a cash outflow. For year one we can take the difference between year zero equity balance and the year one equity balance to obtain an equity contribution of 6.7. And now we can take this and we can copy this formula to the right all the way to year nine. And as you can see, after year 5 in years 6, 7, 8, and 9, there is no additional equity holders cash flows. There is no additional investment by equity holders. Now in year 10 is when we assume that the project will be sold. So we need to compute the equity value of the project at the time that is sold. We have an assumed exit multiple of 10. So we're gonna take that exit multiple of 10 and multiply times the EBIT of 40, of course, 10 times 40 will give us 400, and that will be the enterprise value. But from here, we need to subtract the remaining debt balance in year 10 so that we obtain then our equity value for year 10. And that is, of course, a positive cash flow for equity holders. Now that we have our entire timeline of cash flows to equity holders, we can go back to our IRR calculation and use, of course, the Excel IRR function, select all of the equity holders cash flows, and we get an IRR of the project for the sponsor of 24.8%.