Fault currents of inverter-interfaced distributed generators (IIDGs) depend on inverter controllers. Thus, IIDGs fault currents are different than those of synchronous-based DGs, both from the magnitude and waveshape perspectives. In the event of short-circuit faults, droop-based IIDGs switch between a voltage source and a current source, which increases the complexity and non-linearity of short-circuit current calculation (SCC). This paper proposes a new SCC algorithm that incorporates virtual impedance-fault current limiters (VI-FCLs) to enable modelling droop-based IIDGs as a voltage source behind an impedance. The VI-FCL was implemented as an additional control loop in the inverter control scheme to limit IIDG fault currents and achieve optimal protection coordination (OPC). Further, the VI-FCL is adaptively adjusted to enhance overcurrent protection sensitivity. A two-stage OPC algorithm for directional overcurrent relays (DOCRs) is developed. In Stage I, an optimal value for the adaptive VI-FCLs and relay currents are calculated. Stage II aims at obtaining optimal DOCRs settings. Time-domain simulations are used to demonstrate the effectiveness of the proposed adaptive VI-FCL and the accuracy of the proposed SCC algorithm. The proposed SCC algorithm and the OPC program are successfully validated using an islanded microgrid that is part of a Canadian distribution system.