IRR (Internal Rate of Return)

IRR (Internal Rate of Return) is the annualised effective compounded return rate earned on an invested amount over a project's life, calculated as the discount rate (r) that makes the sum of all discounted cash flows equal to zero: ΣCFt/(1+r)ᵗ = 0. Unlike simple payback period or accounting return on investment, IRR accounts for the time value of money — a rupee received today is worth more than a rupee received in year 5. Two types of IRR are commonly cited in Indian project finance: Project IRR (returns on total project cost, ignoring financing structure — used to evaluate standalone project viability) and Equity IRR (returns on the equity portion only, boosted by financial leverage — this is what an equity investor or promoter actually earns). For a project with 70% debt funding, equity IRR is significantly higher than project IRR.

IRR benchmarks for Indian recycling and waste projects in 2024: EPR-linked plastic recycling (mechanical): project IRR 20–28%, equity IRR 28–40%; CBG / biogas: project IRR 14–22% (dependent on gas offtake agreements and subsidy under SATAT scheme); e-waste recycling: project IRR 18–28%; tyre pyrolysis: project IRR 22–35% (high variance depending on oil yield and disposal cost); lithium battery recycling: project IRR 25–40% for early entrants with secured OEM offtake. These ranges should be treated as indicative — IRR is highly sensitive to feedstock cost, output price, capacity utilisation, and timing of cash flows.

Common ways IRR is gamed or misstated in Indian project DPRs: (1) starting the cash flow at Year 0 capex but projecting revenue from Day 1 of Year 1 without accounting for ramp-up; (2) using terminal value assumptions at Year 10 that dominate the IRR without justification; (3) excluding working capital build (the first 3–4 months of operations require significant cash for receivables and inventory before the first payment cycle completes); (4) mixing nominal and real cash flows inconsistently. The correct practice is to run the financial model in nominal terms (including inflation) and compare project IRR against the weighted average cost of capital (WACC) of the project — if project IRR > WACC, value is created.

For an Indian recycling entrepreneur presenting to lenders or equity investors, the IRR figure alone is rarely sufficient. Banks focus on DSCR and loan repayment cash flows; equity investors focus on equity IRR and exit multiples. Present both, with explicit sensitivity tables showing IRR at ±20% revenue and ±15% cost — a project where IRR remains above 15% even in the downside scenario is genuinely attractive. Projecting IRR above 35% without a very clear, contracted revenue stream is a red flag to sophisticated investors.