Internal Rate of Return (IRR) Internal Rate of Return (IRR) is the average interest rate paid per year for the project evaluated, or, in other words, IRR is the interest rate that balances all operating profits along the project life time with regard to the investment. This parameter is useful to be compared with the opportunity cost of capital that an investor may consider. The following mathematical expression (equation 1) shows how IRR is obtained (considering a life time of 25 years): 25
Operating Profit (k ) = Total investment (1 + IRR) k k =1
∑
(eq. 1)
Production cost excluding capital expenditures In order to estimate total production cost, it is necessary to evaluate the capital cost associated with the investment to be evaluated. This cost is related to the investor’s risk perception, and, in this sense, depends on the nature of the project as well as the risks associated with the country on which the project would take place. As this parameter (capital cost) is crucial to calculate the total production cost, in 2012 a study will be done to improve its evaluation when considering an investment in a sugarcane biorefinery in Brazil, in particular taking into account second generation ethanol production. For this reason, the production costs estimated with respect to the scenarios evaluated were obtained excluding returns on total investments. There are many different approaches to obtain these costs when an industry produce more than one product; among then, a classical methodology is to allocate all the expenses (including capital depreciation) proportionally with respect to each revenue of the products. Therefore, the costs associated to the biorefinery products were estimated reducing their respective average market prices at the same proportion until IRR reached zero.
3.6.2 Environmental indicators In the VSB framework the environmental assessment is made by using the Life Cycle Assessment methodology (LCA). Life Cycle Assessment is a recognized method for determining the environmental impact of a product (or good or service) during its entire life cycle, from extraction of raw materials through manufacturing, logistics, use and final disposal or recycling. 45