![]() Conversely, when debt is reduced or eliminated, the total amount of cash flow required to repay the debt decreases, which shortens the payback period. In general, w hen debt is added to the capital structure, the total amount of cash flow required to repay the debt increases, which extends the payback period. Leverage can also impact the payback period of a project. It represents the amount of time it takes to recoup the initial investment. The payback Period is the time required for a project to generate enough cash inflows to recover the initial investment. Conversely, when debt service payments decrease or are eliminated, the amount of cash available for equity investors increases, resulting in a higher CoC. As debt service payments increase, the amount of cash available for equity investors decreases, resulting in a lower CoC during the debt repayment period. In a levered context, CoC is affected by debt service payments. It represents the cash return received for each Euro invested. The IRR of a leveraged project will be higher than the IRR of an unleveraged project if the cost of debt is lower than the cost of equity.ĬoC is the ratio of the annual cash flow received from the project to the amount of initial investment. ![]() It represents the expected annualized rate of return for an investment. IRR is the discount rate at which the present value of cash inflows equals the present value of cash outflows. The key return metrics used in project finance are the Internal Rate of Return (IRR), Cash on Cash (CoC), Payback Period, and Net Present Value (NPV). This return does not take into account any debt financing costs. In contrast, the unlevered return is the return on equity for a project when it is financed solely with equity. This return takes into account the cost of the debt financing used in the project. ![]() The levered return is the return on equity for a project when it is financed with both debt and equity. unlevered return refers to the difference in returns when a project is financed with debt (levered) versus when it is financed solely with equity (unlevered). In project finance, the concept of levered vs. ![]()
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