Why is the IRR higher if you have a mortgage?

Question

I have to do a valuation of a hotel for my assignment and I have 20% Equity and 80% mortgage, and the leveraged IRR is 52%. If I change it to 100% equity, the IRR reduces to 30%.

Could you please explain why this is?

Many thanks.

Answer

The only reason I can see is that the cost of equity (dividends) is higher than the cost of debt, i.e. the net cash inflows are higher in case the business is financed by debt

Why is the IRR higher if you have a mortgage?

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