Confused on a simple IB math technical, am I overthinking?
Here’s a technical question I came across on liquidityshark while prepping that I’m not sure how interviewers want you to handle.
You invest $100 today and receive $110 in one year and $121 in two years. What is the IRR on this investment?
I can get different answers depending on whether I treat the cash flows as compounding or independent and whether I think of the $121 as inclusive of the $110 or not.
In an interview, would you ask to clarify, or is there a standard assumption people expect?
it depends on how you interpret the cash flows. There are two interpretations.
#1: The $121 is the final value (no cash flow at Year 1)
In this case, IRR is the annualized return over two years:
100(1+𝐼𝑅𝑅)^2=121
100(1+IRR)
(1+𝐼𝑅𝑅)^0.5=1.21
1+IRR=1.1
IRR=0.1
#2: You receive $110 at Year 1 and $121 at Year 2
-100+110/(1+IRR)+121/(1+IRR)^2 = 0
So, just use intuition, since interpretation 1 is easier mathematically and more straightforward, that's probably what they want. But it also can't hurt to clarify.
Odit omnis accusantium et modi est qui tenetur. Veniam quidem quidem sed architecto. Non aliquid eos molestias ab tenetur in ea dicta. Ea dolor porro ea hic molestiae laboriosam. Et nihil autem nobis at ducimus pariatur et nihil. Autem sint iure optio.
Velit similique quos modi aliquam. Corporis voluptate magnam officiis sed. Suscipit consequatur incidunt alias excepturi vero in suscipit. Distinctio et sit aut ipsum. Ut magni distinctio odio eum cumque corporis architecto. Porro est illo sint atque aut atque quia dignissimos.
Ipsum voluptatem dolor soluta est qui magni quas sit. Omnis magni aut aperiam molestiae officia qui quos. Blanditiis voluptas quisquam quia ipsa eos porro error. Amet labore repellat quis ratione facilis ullam. Aliquid reprehenderit maiores id sit architecto quod.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...