CAGR vs. IRR... # of periods...confused...
Hi team - hope everyone is doing well. for some reason i am a bit confused on the difference between cagr and IRR. the formula seems to be the exact same? for LBO purposes.
(final value / beginning value)^(1/#periods) - 1
I'm also confused on the # of periods.
For CAGR, 2012 - 2013 would be 1 period, right? But for an LBO IRR calc, this would be 2 years (since you are seeing cash flows from full year 2012 and full year 2023)? So in my formula above, for the LBO # of periods = 2. But for a simple CAGR calc, # of periods = 1? Is the CAGR only 1 because you are measuring between end of years vs. IRR which captures 2 full year cash flows?
another example: base year of LBO is 2005 (most recent historical year). so first projected year is 2006. 5 year LBO. that means a 2010 exit....doing 2010 - 2006, like you would do for CAGR, would suggest only 4 periods for the IRR LBO formula, but I know you are supposed to use (1/5).
Sorry if this is really basic but I just need some clarifications. Thanks in advance guys, much appreciated
One difference between the formulas is that CAGR (as per the formula you listed in your post) can only handle 2 cash flows - one in and one out.
Whereas IRR can handle interim cash flows as well.
Thanks very helpful. I appreciate your time. Do you mind addressing my other questions as well within my post? Would be really helpful if possible
IRR is the discount rate for which a series of cash flows has $0 NPV
Thanks for your time. If possible do you mind addressing my specific examples / questions? That would help me very much conceptually
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