Hey guys, quick question.
Let's say I'm a sponsor and I have the following cash flow profile when investing in a business
Entry (i.e. inital equity investment): (100) Y1: 0 Y2: 0 Y3: 200 Y4: 0 Y5: 300
The IRR of the above profile, as calculated on Excel is 50%. I am trying to reconcile this mentally and I get the following:
2x MOIC in 3 years = 26% IRR 3x MOIC in 5 years = 25% IRR
Why isn't the overall IRR a weighted average of the two IRRs deduced above (i.e. (40%26%) + (60%25%) = 25.4%)? What am I missing about the underlying IRR math?
Thanks!
Because you are missing the time value of the 3x MOIC in 5 years, since you are not receiving all 500 in year 5. You get the 200 sooner, so it's discounted less, and thus your IRR should be higher.
Got it - so how would you get to the 50% using a mental calculation?
Not sure how...But in interviews its rare for them to ask you to mentally calculate interim cash flows. Normally, it's only final year.
It's close as 5x in 4.2 years so close to 45%, then you have to take into account compounding, so a little bit higher
lol why would it be a weighted average of those two? I mean at minimum it would be a 5x MOIC in 5 years since that's what you're actually making... Then adjust up for time value of money
Yeah makes sense - how would you adjust up for TVOM mentally?
The 300 is in addition to the 200 return. the 25% of the 300 is a standalone return, however at that time you already have -100 invested (invested 100 and return of 200), so you cant simply add or take an average.
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