Interview question.
Period 0: -110
Period 1: 10
Period 2: 10
Period 3: 10
Period 4: 110
Calculate IRR
Trending Content - Private Equity Forum
| +47 | Independent Sponsor - Path Ahead? | 15 | 1d |
| +34 | 2026 PE Associate Bonus Thread | 40 | 1d |
| +34 | Legacy vs. Up-and-Coming Funds | 16 | 1d |
| +27 | Return Full-Time to EB vs. Lindsay Goldberg FT Analyst | 8 | 5d |
| +21 | Semi-target into IB (London) -> PE | 20 | 4d |
| +19 | Do you regret doing PE? | 6 | 22h |
| +15 | Mid Level Attrition | 9 | 52m |
| +11 | those of you who had an easy banking experience - how f’d were you when you went to PE? | 7 | 3d |
| +9 | PE Junior Summer? As an undergraduate at a target school? | 1 | 3d |
| +8 | Why is every PE firm so top heavy? | 3 | 2d |
Career Resources
Very high level using rounding:
IRR = (MOIC - 1) / Hold Period + a little bit to account for compounding
IRR = (1.27 - 1) / 4 + a little bit
IRR = 6.75% + a little bit
Actual IRR = 7.04%
I initally read that the inital investment was 100, in which case you could have simply derived IRR by thinking of it as a a YoY compound metric (10% in this case) that returns the inital investment in the last year (100+10) for a total IRR of 10%. However, after reading it again and seeing the initial investment is 110, it is a bit more tricky.
As mentioned above, you can calculate the total MOIC (140/110) = 1.27x = 27% and divide it by the holding period (four years) to get the annual yield (c. 6.8% in this case). Generally, you need to discount this arithmetic return a bit to account for the compounding effect of IRR, e.g. to 6%. Additionally, IRR is time-weighted, hence having early cashflows in year 1-3 in this example will boost IRR a bit, yielding to the c. 7% result.
Hope this helps.
Thank you for your response.
I'm confused about first decreasing IRR to 6% (discounting arithmetic return to account for the compounding effect) and then increasing it to 7% (early cashflows boost IRR).
If you want to discount cash flows more, don't you have to increase the discount rate, in this case the IRR? Why are we lowering closer to 6% instead of bumping to 7%? The first comment to this post says "+ a little bit to account for compounding", that's why I'm confused.
Can you recommend any resources to better understand IRR and such questions? I need to improve.
Odio et consequuntur officia doloremque earum distinctio repellendus. Aut saepe consectetur laudantium est ex atque vero. Ut illum blanditiis praesentium eum excepturi reiciendis quo corrupti. Est quia itaque vel quaerat.
Occaecati maxime illum eum numquam et. Possimus eius temporibus earum fuga dignissimos consectetur sed. Minus porro magnam quam ratione. Ipsum voluptatibus recusandae est. Occaecati ea doloremque possimus eligendi saepe voluptatem et. Dolorum est dolorum facere cumque dolorum rerum illo.
Hic impedit aspernatur nemo aut qui magnam et. Nam exercitationem nemo assumenda placeat. Sint repellendus ex voluptatem assumenda id. Commodi voluptates modi illo rem vitae explicabo voluptatibus. Omnis nam sed labore ut.
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...