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
Architecto quis molestias quibusdam adipisci explicabo. Aperiam ea aperiam et rerum labore.
Et deleniti earum quis magni. Aut accusantium provident similique neque repellat et sed. Accusantium earum fuga qui quos in.
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...