One time transaction IRR Calculation

[HP4868]

I am trying to calculate IRR on a one time transaction as follows

initial investment $6.1 Million
Return captured 120 days later $17.5 Million

our investment partner has an IRR threshold at which point we receive an equity claw back and higher percentage of the proceeds. I am having difficulty figuring out the exact way to calculate the IRR based on this transaction. the ROI is basically 287-288% but since it occurred in less than 1 year time frame I am getting hung up on how to actually account for an IRR. assumption is that day 1 investment was -$6,100,000.00 120 days later the gross return on that investment was $17,500,000, Net Proceeds of $11,400,000.

thanks for your help.

 

[oldbrewer]

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[TD="align: right"]287.5[/TD]
[TD="align: right"]0.007871[/TD]
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[TD]millions[/TD]
[TD]daily int[/TD]
[TD]tot int[/TD]
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[TD]day[/TD]
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[TD="align: right"]6.1[/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.048015[/TD]
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[TD="align: right"]1[/TD]
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[TR]
[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.09603[/TD]
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[TD="align: right"]2[/TD]
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[/TR]
[TR]
[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.144045[/TD]
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[TD="align: right"]3[/TD]
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[TD="colspan: 4"]I only make the interest earned in 120 days[/TD]
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[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.19206[/TD]
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[TD="align: right"]4[/TD]
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[TD][/TD]
[TD="colspan: 2"]5.76 m gross[/TD]
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[TR]
[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.240075[/TD]
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[TD="align: right"]5[/TD]
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[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.28809[/TD]
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[TD="align: right"]6[/TD]
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[TD="colspan: 4"]is interest simple or compound ?[/TD]
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[TR]
[TD][/TD]
[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.336105[/TD]
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[TD="align: right"]7[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.38412[/TD]
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[TD="align: right"]8[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.432136[/TD]
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[TD="align: right"]9[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.480151[/TD]
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[TD="align: right"]10[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.528166[/TD]
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[TD="align: right"]11[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.576181[/TD]
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[TD="align: right"]12[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.624196[/TD]
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[TD="align: right"]13[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.672211[/TD]
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[TD="align: right"]14[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.720226[/TD]
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[TD="align: right"]15[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.768241[/TD]
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[TD="align: right"]16[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.816256[/TD]
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[TD="align: right"]17[/TD]
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[TD="align: right"]0.048015[/TD]
[TD="align: right"]0.864271[/TD]
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[TD="align: right"]18[/TD]
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[joeu2004]

initial investment $6.1 Million
Return captured 120 days later $17.5 Million
[....]
the ROI is basically 287-288% but since it occurred in less than 1 year time frame I am getting hung up on how to actually account for an IRR.

For a "one time" transaction (really two cash flows), the IRR is the same as the CAGR. The annualized IRR would be:

=(17.5/6.1)^(365/120) - 1

which is about 2367.15% (!).

As you might imagine, that is a very misleading figure. For that reason, for terms of less than one year, it is common to report the YTD rate of return:

=17.5/6.1 - 1

which is about 186.89%.

That should be the same as the ROI. Apparently, you added 100% (1). I don't know why.

 

[joeu2004]

PS....

For a "one time" transaction (really two cash flows), the IRR is the same as the CAGR. The annualized IRR would be:
=(17.5/6.1)^(365/120) - 1
which is about 2367.15% (!).

Again, I recommend that you use the YTD rate of return instead an annualized rate.

But if you insist on annualizing, some second thoughts about the formula above.

365/120 assumes 120 actual days. And it assumes 365 actual days in the year.

If "120 days" actually refers to 4 months of 30 days each, it is better to write 360/120 or 12/4.