When we think about returns, we are thinking about the profitability of the project to shareholders, and we can use two main methods. The net present value or the IRR, which stands for internal rate of return. The internal rate of return is much more commonly used in these type of projects than the net present value. And what the internal rate of return is trying to do is give you the return on the project expressed as an interest rate. And what that does effectively, it says that's the return you're getting on the money you are investing in the project over the project's life. So the IRR is by far the most frequent method of evaluating this project. So how do we do this? Well, firstly, you've gotta think about the cash outflow, and that's the investment into the project. And these are typically contributions during the construction phase. And remember, we're thinking about this from the shareholder's perspective. So this means we're just looking at the equity contributions, the cash inflow, which again, this is from the shareholder's perspective, is the cash flow, which is coming out of the project to the shareholders. We want to use dividends rather than cash flows to equity holders. And the reason for that is that the lenders often restrict the amount of cash that is able to be paid out to shareholders. And there's a couple of ways in which they do that. They will have a minimum debt service coverage ratio. They will also have the debt service reserve account, and all of those things will trap cash into the project entity without it being able to be paid out to shareholders. Also, the other issue is what happens towards the end of the project? Some projects will have a natural lifecycle and they will need to be shut down at the end, for example, if it's a mine or an oil well. However, some projects like bridges or roads, they can be sold after a certain number of years, usually when all of the debt is paid off. And that means that there will be a big cash inflow to shareholders towards the end of the project. And that also needs to be factored into your IRR calculation. In principle, if the internal rate of return is higher than the expected cost of funding to the shareholders, they should do the project. If the internal rate of return is lower than the cost of funding, don't do it.

The one complexity here is that some of the sponsors or the equity investors won't just invest in equity in the project. They may also provide things like operational roles or construction roles. So they could be a shareholder and part of a consortium doing the construction, they may be a shareholder and the operational company. As a consequence, it can get a little bit tricky and there is a bit of shades of gray when you're looking at returns in those situations.