In this workout, we're going to evaluate a project from the sponsor's perspective by calculating the internal rate of return. We have some forecasts on EBIT, the debt balance and the equity balance from year zero through year 10. Now, profit is negative in year four and it turns positive in year five, and it's gonna increase after year five all the way through year ten. The debt balance, of course, increases in the early years through the construction phase into year five, after which the project is gonna generate enough profit and enough cash cashflow to help pay down the debt. Equity financing also increases in the early years through the construction phase, and this is because typically equity investors put money in on a pro-rata basis. And this means that when debt financing increases, equity financing must increase on a proportional basis. And you can see here that 70% of the capital is coming from debt financing. While 30% of the capital is coming from equity financing. We're gonna assume that at the end of year 10, the project does not get shut down, but instead it gets sold at a multiple of 12 times ebit. Another simplifying assumption is that the project will not pay any interim dividends. So let's go ahead and compute the equity investors cash flows. Starting in year zero. There is an equity contribution of 17.1, so we make a negative because this represents a cash outflow to equity holders. In year one the equity contribution is the change in the equity balance. So I'll take last year's equity balance minus this year's equity balance for an equity contribution of 8.6. I'm gonna copy this formula all the way through year nine.

And as you can see in the year 6, 7, 8, and 9, there is no additional equity contributions. In the year 10 is when the project gets sold at 12 times EBIT. So we're gonna compute the product of 12 times the EBIT of 40, but we gotta take out the remaining debt balance, which is the payment that goes to lenders, and that will be 80.

So what's left is 400, and this is an equity value or the cash inflow from the sponsor's perspective.

Now that we have forecasted the equity holders cash flows throughout the 10 year forecast period, we can calculate the internal rate of return of the project using the IRR Excel function. Now in this case, we don't have to input a guess since there is only one change in sign from negative to positive. So all we need to do is select all of the cash flows in the timeline and that will give us an IRR of 24.4. And that is of course, the return on the project from the sponsor's perspective.