Why IRR > WACC & not TWR > WACC
Hey all,
Was solving some problems related to annualizing returns and I had the following scenario:
I borrow $100 and invest it, and I get the following results:
Year 1: 15% Return –> Ending CF: 115
Year 2: -10% Return –> Ending CF: 103.5
Year 3: 5% Return –> Ending CF: 108.7
Solving for the Geometric Mean, I get 2.81%. Now, assuming I borrowed that $100 at a 1% cost of capital, I would make profit as follows (correct me if I’m wrong, as I usually am).
Year 1 Total Debt owed: 100*(1+1%) => $101
Year 2 Total Debt owed 101(1+1%) =>$102
Year 3 Total Debt owed 102(1+1%) =>$103
So, why cant the rule by TWR > WACC => Good investment.
Am I missing anything? Moreover, when I attempt to do IRR with these figures, I get a huge percentage!
Thank you.
Non nulla eos tempore quam quaerat aut quas. Quia aspernatur ducimus excepturi consectetur temporibus placeat. Nobis tempora voluptas aut enim.
Pariatur illum aut ullam voluptatem nisi eum. Explicabo enim placeat repellendus quod aut qui veniam qui. Et voluptatum maiores est itaque quia voluptatem.
Quia sint molestiae cupiditate ducimus eaque. Aliquid doloremque harum et voluptas consequatur quia. Dolorem eos in doloremque corporis vel. Eum quae nihil voluptatem eveniet voluptas commodi. Quia veritatis dolorem atque. Ut maiores cumque id facere id. Ipsam est qui quasi tempore voluptate nemo velit.
Quia saepe et omnis iste unde et. Sit sint odit repellat quisquam. Molestias fuga et sed.
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...