Calculating IRR of cash flows with terminal value

I have a project with an initial outlay (Year 0) and 10 years of forecasted positive FCFFs and FCFEs. After 10 years, I use a Gordon/Perpetuity Growth Model to determine Terminal Value.

I built DCF model and discounted FCFFs with WACC (to arrive at Enterprise Value) and FCFEs with Cost of Equity (to arrive at equity value).

While calculating the terminal value for both cases (FCFF and FCFE), I use perpetuity growth formula:

CF10 * (1+g) / r-g where:

CF10 = FCFF/FCFE of the Year 10; g = growth rate; r = discount rate (WACC for FCFF, Cost of Equity for FCFE).

At the moment, I am trying to determine IRRs (Project IRR from Enterprise Value and Equity IRR from Equity Value). However, I have the following Issue:

  • While calculating IRRs with excel IRR formula, I supposedly do not get the correct rate, as far as I use WACC/Cost of Equity ("r" in the above given formula) to calculate Terminal Value. I get two possible IRRs:

1) IRR calculated using Goal Seek; 2) IRR calculated using excel built-in IRR formula (apparently, rate is higher in the 2nd case).

When I check results by setting WACC/Coe to IRR Values, Goal-Seek calculated IRRs return Zero NPV. However, I am not sure this is a correct method to use. Moreover, I need my model to be dynamic (therefore, I can not use Goal Seek).

However, if you use Fixed WACC/CoE in Terminal Value calculations, excel built-in formula calculated IRRs return Zero NPV as well. I am not sure about this method as well and as I mentioned above, my model has to be dynamic.

In order to better understand the issue, please find attached the sample xls file with relevant calculations.

Any suggestion would be greatly appreciated.

Attachment Size
example.xls 49 KB 49 KB
3 Comments
 

I don't know how the hell to use your model but WACC should change as the capital structure changes (not necessarily fixed at X.X%). I'm guessing your capital structure changes somewhere and that's probably your problem. Just use your target IRR as your valuation metric (go or no) on the project easy enough.

 

Doloremque animi odio magnam possimus. Perspiciatis non quam nihil esse est.

Consequatur velit architecto et dolores sint nihil explicabo. Aspernatur eum sit hic illum doloremque officia. Dolorum omnis pariatur nostrum ducimus. Odio eum quo eos voluptatem. Autem quo et vitae dolores cupiditate sed numquam. Impedit saepe asperiores et rem mollitia rerum. Quo aut ut omnis commodi perspiciatis non sint sequi.

Career Advancement Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • JPMorgan 01 98.3%
  • Guggenheim Partners 01 97.8%
  • Morgan Stanley 07 97.2%

Overall Employee Satisfaction

July 2026 Investment Banking

  • Moelis & Company No 99.4%
  • Evercore No 98.9%
  • Morgan Stanley 01 98.3%
  • Banco Santander 02 97.7%
  • BMO Capital Markets 12 97.2%

Professional Growth Opportunities

July 2026 Investment Banking

  • Evercore 01 99.4%
  • Moelis & Company 01 98.9%
  • Morgan Stanley 06 98.3%
  • Goldman Sachs 01 97.8%
  • JPMorgan 01 97.2%

Total Avg Compensation

July 2026 Investment Banking

  • Vice President (16) $429
  • Associates (46) $258
  • 3rd+ Year Analyst (8) $210
  • 2nd Year Analyst (22) $179
  • Intern/Summer Associate (14) $159
  • 1st Year Analyst (80) $150
  • Intern/Summer Analyst (73) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”