CFA Level I · CFA Level I Exam · Alternative Investment Performance and Returns
An investor commits to a fund and has these net cash flows to the investor: Year 0: –$100 million (paid in); Year 1: $0; Year 2: +$121 million (distribution). There is no residual value. The investor's IRR is closest to:
The IRR is the discount rate equating the present value of the $121 million distribution two years out to the $100 million paid in. Since 121/100 equals 1.21 and the square root is 1.10, the IRR is 10% per year.
- A10.0%Correct
- B21.0%
- C42.0%
Explanation
Solve 100 = 121/(1+r)^2, so (1+r)^2 = 1.21 and r = 10%. The 21% option is the total two-year return not annualized; 42% is a sum-of-errors figure. A check: 100 × 1.1^2 = 121.
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