Differences between FIRR and EIRR
Aspect | FIRR | EIRR |
Stands for | Financial Internal Rate of Return | Economic Internal Rate of Return |
Definition | Measures the return on investment based on actual cash inflows and outflows from the perspective of the investor or organization. | Measures the overall economic benefit to society, including externalities and indirect benefits/costs. |
Focus | Financial viability of the project for the implementing agency. | Economic desirability of the project for the society as a whole. |
Costs Considered | Only financial costs (capital, operating, maintenance). | Includes financial costs plus social and environmental externalities. |
Benefits Considered | Only monetary returns (e.g., revenue, savings). | Both monetary and non-monetary benefits (e.g., time savings, environmental improvements). |
Subsidies/Taxes | Included in the calculation. | Excluded, as they are transfers and not real resource costs. |
Discount Rate | Based on the cost of capital or desired return. | Based on social discount rate (usually lower). |
Example | A railway project yields FIRR of 10% based on ticket revenues and costs. | The same railway project has an EIRR of 18% when time savings for passengers and reduced pollution are included. |