Confused about IRR
I'm a bit confused about IRR. I understand that it's a break-even rate, but am confused as to why it's considered a rate of return similar to ROI. Does IRR tell you what the actual estimated rate of return is going to be given a certain set of cash flows? Or does it simply tell you the rate of return at which you would break even? When people say they use IRR for a project's rate of return, is the IRR their actual estimate for the return on the project?
I'm just trying to understand it intuitively -- thank you!
In Accademic finance IRR is such that NPV=0=SUM(CFn/(1+IRR)^n). This is effectively the break even rate that can be used to calculate the floor value in an LBO with a set IRR
In real life IRR is : Value at Entry = Value at Exit / (1+IRR)^Holding period. This is the IRR of a PE shop after they are done with their investment - effectively the yearly compounded ROI.
EDIT: in the second case, I am assuming only one cashflow (sale of the PortCo), so no dividends, dividends recap to simplify things.
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