CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding
Kiran Fund invests ₹5 crore in Zest Tech for 25% equity. After four years it sells its entire stake for ₹20 crore. Ignoring interim cash flows and costs, what is the approximate annual compounded return (IRR) on this investment?
The annual compounded return is about 41.4 percent. The stake grows from ₹5 crore to ₹20 crore, a fourfold multiple over four years, so the rate is the fourth root of 4 minus 1, which equals the square root of 2 minus 1. Simple averaging gives a wrong 75 percent.
- AApproximately 41.4%Correct
- BApproximately 75%
- CApproximately 31.6%
- DApproximately 300%
Explanation
Multiple = 20/5 = 4 times. IRR = 4^(1/4) - 1 = √2 - 1 = 1.4142 - 1 = 41.4%. The 300% figure is total gain, not annual; 75% is simple average (300/4), which ignores compounding.
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