Assume you make an initial investment of $500M, and it pays out $200M in yrs 1-5. Is there a way to calculate the ~29%IRR on this investment without a calculator?
Is there then a way to be able to guesstimate what IRR would be had all positive cashflows been received at exit based solely on the above vs memorizing that a 2x MoM in 5 yrs is 15% IRR?
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Based on the most helpful WSO content, calculating the internal rate of return (IRR) for a series of constant cash flows without a calculator involves understanding the relationship between the cash flows and the initial investment. Here's a simplified approach to estimate the IRR:
To estimate the IRR:
Rule of 72: This is a quick way to estimate the doubling time of an investment. Divide 72 by the expected IRR to find how many years it would take to double your investment. In reverse, if you know the doubling time, you can estimate the IRR. However, this method is more of a rough estimate and works best for constant rates of return.
Payback Period: Calculate how many years it takes to get your initial investment back. In this case, it's $500M / $200M = 2.5 years. The IRR must be higher than the rate that would just pay back the initial investment over the investment period.
Multiples of Money (MoM): If you know that a 2x MoM in 5 years corresponds to an IRR of approximately 15%, you can use this as a benchmark. Since the cash flows in your scenario result in a 2x MoM ($200M x 5 years = $1000M, which is 2x the initial $500M), you can infer that the IRR would be around 15% if all positive cash flows were received at the end.
To guesstimate the IRR for the original scenario with annual payouts:
Given that the actual IRR is around 29%, this is significantly higher than the 15% benchmark for a 2x MoM over 5 years. This is because receiving money earlier increases the IRR due to the time value of money.
To estimate the IRR without a calculator, you would need to use a combination of these methods and adjust based on the timing of the cash flows. However, for precise calculations, especially with large sums and complex cash flow structures, using a financial calculator or Excel is recommended.
Sources: How do you compute IRR without any negative cash flows?
Delete, I was being stupid mathematically
To clarify, my question was how to solve the return of the dividend payouts without memorizing the shorthand 2x in 5 yrs is 15% IRR. Also guessing by adding a few points feels too high of an error margin when return 15% higher with the cashflow timing.
Wanted to see if there was a more intuitive answer than plugging into an annuity calculator.
Following - I don’t think it’s possible
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