Question about IRR
Let's say the target expects to generate negative cash flows of $2 million in the first two years (say negative $1 million cash flow for each year) before generating positive cash flows in the third year, so it requires $2 million capital injection to run the business.
When you calculate the IRR, should you take into account the $2 million negative cash flows in the first two years given that you already made an investment of $2 million at t=0? (i.e. t=0, CF0=-2; t=1, CF1=-1; t=2, CF2=-1)
You take into account whatever cash flows happen in the year they happen. You do not put the 2 million in t=0 unless there is an initial outlay of 2 million, which is not what you're describing. You don't seem to understand what the point of the t's is. It is time, it is not arbitrary.
In any scenario t=0 is the time of the initial cash outlay. In your case this is when the first 1 million is paid. This the CF at t=0 i.e. CF0 is -1m. Then you're saying a year from then (i e. t=1), another 1 million is paid. That's CF1 of -1m. It's as simple as putting the cash flows when they happen...
But when you calculate the IRR, shouldn't you take into account the initial investment of $2m, which happens at t=0? In other words, shouldn't the NPV be equal to $2m when we find the IRR? What I'm confused about is that should I take into account the negative net cash out flows in t=1 and t=2. I've got a reply from another person who says that the 2 million spent in the first two years are not cash flows to the investor but an outlay of the company, so cash flows in years 1 and 2 are considered 0. What do you think?
Need more info on the t=0 $2mm investment. Is it going to the company’s balance sheet, or elsewhere?
edit: another question, who is making the $2mm investment? Do they own 100% of the company?
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