Say the investment horizon is 3 years.
In year 1, you invest 4MM at 11c/share.
In year 2, you invest 3MM at 20c/share.
If the stock price by the end of year 2 A. falls to 10c/share or B. rises to 25c/share, what is your total return for your investment?
Seems like a rather easy question but can't wrap my head around it, thanks
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You just need to build the cashflow schedule and use the IRR function in Excel / your calculator.
In Period 1, you spent $4mm and purchased 36.4mm shares at 11c/share. In Period 2, you spent $3mm and purchased 15mm shares at 20c/share. Your total shares are 51.4mm
If the price goes to 10c/share, you will receive $5.14mm from selling. At 25c/share, you receive $12.8mm.
Your cashflows in the two cases are:
10c -$4mm, -$3mm, +$5.1mm = ~ -18% IRR
25c -$4mm, -$3mm, +$12.8mm = ~ 46% IRR
Thanks a ton! Got it :)
One last quick question, how would our IRR change if the time periods were 6 months instead of 1 year(so investments on month 1, month 7, etc)? Does that make a difference in the excel function?
The simple irr-function calculates in periods, i.e. every cell down with a number in it is one period. Word of advice, always use the xirr function if you are doing anything with specific dates. It gives you much more flexibility to insert cash flows, change time periods etc.
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