First time I (and the office) have seen this so am just sounding out WSO.
To calc. IRR by (cash multiple)^(1 / time period) -1, is this common? best practice? or just lazy?
Cheers for any input.
How To Calculate IRR Manually
Since you can’t calculate IRR by hand, unless you use a trial and error method until you reach a solution in which net present value equals zero, there are some shortcuts you can use. The most common shortcut is memorizing simplified outputs of an IRR table such as:
- Double your money in 1 year, IRR = 100%
- Double your money in 2 years, IRR = 41%; about 40%
- Double your money in 3 years, IRR = 26%; about 25%
- Double your money in 4 years, IRR = 19%; about 20%
- Double your money in 5 years, IRR = 15%; about 15%
The above calculation from OP of IRR = (cash multiple)^(1/time period)-1 seems to be another shortcut. It is only an exact match for IRR if there are only two cash flows – entry and exit. If you receive any dividends along the way then it is only an approximation.
Learn more about IRR and other financial metrics in the WSO Financial Dictionary.
Saw this for the first time ever. Seems like a good approximation and useful for a quick back of the envelope calculation when you are away from the computer. Not useful for any other situation IMHO.
If there are only two cashflows to the investor - beginning investment and equity value at exit - then the formula is an exact match for IRR.
A 2.5x cash-on-cash multiple means that for every $1 invested you took $2.5 back out. If that happens over a 5 year investment horizon then your IRR = CAGR = 20%.
If you're getting periodic dividends along the way then it's just an approximation.
[double post]
Curious if anyone else has thoughts on this
IRR and CAGR are mathematically equivalent calculations when there are only two payments (entry and exit).
formula does the trick, yes
As @Downtown said looks like it only works when there are only two cash flows, entry and exit...when there are large dividends in the years in between then it doesn't quite work.
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