So advising on a greenfield project
Investor wants to exit in 3-6 years and wants to see IRR on each year of exit
I have made a detailed model and everything and to get an exit value I used the EV/EBITDA multiple and gotten the equity value after adjustments. That is the value of exit taking into account shareholding
I have calculated IRR using that.
What I want to know is how else can I show the IRRs for each year of exit
DCF? How would that go. Get PV of future cashflows to the year of exit and multiply by shareholding to get exit value and then calculate IRR?
What else?
should the different methods give similar returns?
Build your IRR off of exit value + inter-period cash flows. That way, each year will be an IRR of whatever exit value you're getting that year + any distributions from prior years.
Let me know if that's clear enough.
Thats what I have done.
Conceptually in a dcf the IRR will remain same
You are thinking about it the right way. What I would want an analyst to show me: For each year of exit: EV / EBITDA assumption Implied IRR Implied IRR of the next buyer (i.e. the one who buys from you in year of exit, what would he earn on the same business plan till the end of your model?)
Obviously you might want to turn it around and make next buyer's IRR an input (essentially DCF as you call it) and see what EV / EBITDA it imples.
Either way is good.
Normally in a development situation you obviously expect that you earn much better return vs next buyer because you take development risk and he buys something safe. E.g. you develop a business centre in a big city and earn 20% equity IRR exiting shortly after construction is done and target occupancy achieved, and the next buyer effectively purchases from you a safe / core real estate (where low teens to high single digits IRR would be appropriate in a developed world)
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