CFA Level I · CFA Level I Exam · Investments in Private Capital: Equity and Debt
A venture investor commits $10 million to a company today and receives a single payment of $32.8 million at the end of Year 4, with no other cash flows. The investor's IRR is closest to:
The IRR is about 35%. The multiple is 32.8/10 = 3.28, and the fourth root of 3.28 is roughly 1.346, giving an annual return near 34.6%. Simply dividing the total gain by four years would overstate the figure and ignore compounding.
- A23%
- B35%Correct
- C70%
Explanation
Multiple = 3.28. IRR = 3.28^(1/4) − 1. sqrt(3.28) = 1.811, sqrt(1.811) = 1.346, so IRR ≈ 34.6%, about 35%. Check: 1.35^4 = 3.32, close to 3.28. Dividing the 228% gain by 4 gives 57%, and 23% is nearer to a three-year compounding error.
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