A project's return comes from its cash flow.
Write down what you put in today, what it pays back each year and what's left at the end. With that you know what it earns a year, when you get your money back and whether it beats your alternative.
Build the cash flow
The cash flow is the list of what comes in and goes out each year. Year 0 is what you invest, as a negative. Each following year is what the project collects minus what it costs to run: maintenance, insurance, management and taxes. If something is sold or keeps a value at the end, it goes in the last year.
This guide's example: you invest 100,000,000 pesos. The project collects 18,000,000 pesos in year one and spends 3,000,000 pesos running it; both rise 4% a year, for 10 years.
What a cash flow projection is
The four indicators
Once the cash flow is built, four figures answer four different questions. None is enough on its own.
- 1
ROI: what you earn in total
Everything that comes back minus what you put in, divided by what you put in. In the example it's 80%, but over 10 years: it doesn't say when the money arrives, so it can't compare different terms.
What ROI is - 2
Payback: when your money comes back
The year in which the running total of the cash flow turns from negative to positive. In the example, after 6.0 years. What comes after is profit; the later it is, the longer your money is exposed.
What payback is - 3
IRR: what it earns a year
The rate at which the project pays your money back, as an effective annual rate. That's why you can set it next to a CDT's effective annual rate. In the example: 11.57% effective annual.
What IRR is - 4
NPV: what it earns beyond your alternative
It brings each year's flow back to today's pesos at your alternative's rate, say a CDT at 9% effective annual, and subtracts the investment. If it's positive, the project earns more than the alternative; if negative, less. In the example: 12,418,645 pesos.
What NPV is
The example, year by year
One row per year, with the flow and the running total. The year the running total turns positive is the payback year.
| Year | Income | Costs | Net flow | Running total |
|---|---|---|---|---|
| 0 | — | — | -100,000,000 | -100,000,000 |
| 1 | 18,000,000 | − 3,000,000 | 15,000,000 | -85,000,000 |
| 2 | 18,720,000 | − 3,120,000 | 15,600,000 | -69,400,000 |
| 3 | 19,468,800 | − 3,244,800 | 16,224,000 | -53,176,000 |
| 4 | 20,247,552 | − 3,374,592 | 16,872,960 | -36,303,040 |
| 5 | 21,057,454 | − 3,509,576 | 17,547,878 | -18,755,162 |
| 6 | 21,899,752 | − 3,649,959 | 18,249,794 | -505,368 |
| 7 | 22,775,742 | − 3,795,957 | 18,979,785 | 18,474,417 |
| 8 | 23,686,772 | − 3,947,795 | 19,738,977 | 38,213,394 |
| 9 | 24,634,243 | − 4,105,707 | 20,528,536 | 58,741,930 |
| 10 | 25,619,613 | − 4,269,935 | 21,349,677 | 80,091,607 |
Common mistakes
The ones that change the result most, and how to avoid them.
Comparing total ROI with a yearly rate
80% over 10 years isn't 80% a year. To compare with a CDT use the IRR, which is already effective annual.
Leaving costs out
Maintenance, insurance, management, taxes and fees. A cash flow without costs gives an IRR the project won't have.
Treating the projection as a fact
A project's IRR comes from assumptions: prices, occupancy, output, inflation. See which ones they are and what happens if they change.
Forgetting when you can take your money out
Two projects with the same IRR aren't the same if one pays you back in 3 years and the other in 10. Look at payback and the term too.
Frequently asked questions
What's the formula for IRR?
There's no direct formula: it's the rate that makes the cash flow's NPV zero. It's found by trying rates, which is what Excel's =IRR does.
What's a good IRR?
No single figure works for everyone. Compare it with what an alternative pays over the same term, like a CDT, and ask for more when the project carries more risk or ties up your money for longer.
What's the difference between IRR and ROI?
ROI says how much you earn in total on what you put in, whenever it arrives. IRR says what it earns per year, taking into account when each peso arrives. To compare projects with different terms, use IRR.
What does a projected return mean?
That it comes from an estimated cash flow, not from results already obtained. If actual income or costs change, the actual return changes too and can be higher or lower.
How do I calculate a project's return in Excel?
Put the cash flow in one column: the investment as a negative in year 0 and each year's net flow below it. Use =IRR(range) for the IRR, and =NPV(rate, flows from year 1 on) plus year 0 for the NPV. In Spanish Excel they're =TIR and =VNA.
Projects you can take part in
Each project publishes its projected figures and its risks on its page. Read them with this guide's four indicators.
Project in Construction
Project in Structuring
Project in Structuring
Project in Operation
Project in Structuring
Project in ExplorationCasa Lago
La Pintada, Colombia
This project is currently under study. We will notify you when it becomes available for participation.
Keep going
- What is IRR?The short lesson, with an example.
- How to compare a CDTThe most common alternative: what you really keep after taxes and inflation.
- Solar Subway - La PintadaA private solar energy project in Antioquia. See how it's structured and what risks it carries.
Educational content. It is not financial, legal or tax advice, nor a public offering of securities. The example project is made up and its figures don't belong to any project. Every stake in a private project carries risk, and its results depend on how the project performs.