Assuming the financial sponsor exited the investment in Year 5, the estimated IRR is 24.6% while the MOIC is 3.0x. Your multiple on invested capital is 4.6x, so your IRR formula should be 4.6^(1/7)-1. Hence, the IRR is 0% and MOIC is 1.0x in Year 0, which means the return was neutral and the full initial investment was recouped. Assume $20 of D&A in Year 0, growing by $5 every year. Do I use -70 in calculation if fully funded (this is the purchase price), not included additional debt required for transaction fees?2. LBO Returns Analysis: Measuring IRR and MOIC - YouTube MOIC can be calculated using the following formula: For example, if you invest $1,000 and your return after 2 years is $10,000, then the MOIC for your investment is 10x. Primarily because you're guestimating the IRR to begin with if you can guetsimate the IRR why would you need to go through your way of calculating NPV twice and triangulating what the actual IRR is? Except for Year 0 the date of the LBO all the other years represent net positive values to the sponsor. On the other hand, IRR allows for investors to understand the impact of varying hold periods on investment returns. Obviously, thats still a great return for the investor. Yes, you absolutely need to memorize this. IRR is not a perfect way to calculate returns, but it is one of the better metrics for many real estate, private equity, and venture capital assets (among others). Sometimes it's easier to think of IRR conceptually as an equivalent interest rate. It won't be exact, but 99% of the time, I'll be able to give the trader or researcher a definitive answer in five seconds rather than getting the TI-89 and pencil/paper out and taking five minutes. Thats it! If theRead more . Well now move to a modeling exercise, which you can access by filling out the form below. Performance fees (carry, promote, incentive, etc.) Additionally, the IRR calculation assumes distributions are reinvested at the same IRR. We're sending the requested files to your email now. If you make an investment, and pay 10% premium to book value and receive a 5% dividend, book value CAGR = 10% and you sell it at 10% premium after 5 years, what would your approximate IRR be? Youll notice that time was not factored into this calculation. Or, an alternative method to calculate the IRR is the following: The XIRR Excel function is preferable over the IRR function as it has more flexibility by not being restricted to annual periods. Praesentium esse natus hic. Assuming that the transaction is cash-free & debt-free, the $1,000 Enterprise Value is also your Equity Purchase Price. 2) Dividend income = 5%1.1+5%1.1^2+5%1.1^3+5%1.1^4+5%1.1^5 = 5%(sigma k=1 to 5 1.1^k)