Question

Firm A plans to buy Firm T in a LBO for $759,600. The target is projected to earn $270,000; $290,000, and $300,000 for the next three years respectively. If Firm A plans to sell Firm T after year 3 for $3,060,000, what is the IRR of the investment? (Assume a WACC of 12%)

Answer 1

IRR is the Rate at which PV of Cash Inflows are equal to PV of cash Outflows

Year	CF	PVF @64%	Disc CF	PVF @65%	Disc CF
0	$ -7,59,600.00	1.0000	$ -7,59,600.00	1.0000	$ -7,59,600.00
1	$   2,70,000.00	0.6098	$ 1,64,634.15	0.6061	$ 1,63,636.36
2	$   2,90,000.00	0.3718	$ 1,07,822.72	0.3673	$ 1,06,519.74
3	$   3,00,000.00	0.2267	$      68,012.65	0.2226	$      66,783.54
3	$ 30,60,000.00	0.1382	$ 4,23,005.52	0.1349	$ 4,12,843.69
NPV			$        3,875.04		$      -9,816.67

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in Disc Rate ] * 1%

= 64% + [ 3875.04 / 13691.71 ]

= 64% + 0.28%

= 64.28%