CMA Intermediate · Financial Management and Business Data Analytics · Sources of Finance
A venture capital fund invests ₹4 crore in a start-up for 40% equity. After five years the fund exits by selling its entire stake for ₹14.58 crore (rounded in the question). Using the compound-growth approach, which value is closest to the fund's annual return (IRR) on this investment, given that (3.645)^(1/5) ≈ 1.29?
The fund turns ₹4 crore into ₹14.58 crore, a multiple of 3.645 over five years. Taking the fifth root gives about 1.29, so the compounded annual return is roughly 29 percent.
- A29%Correct
- B36.45%
- C73%
- D14.5%
Explanation
Money multiple = 14.58 / 4 = 3.645. Annual return = 3.645^(1/5) − 1 ≈ 1.29 − 1 = 29%. Dividing the gain by years (264.5%/5 ≈ 53%) ignores compounding, and 36.45% misreads the multiple.
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