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]

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

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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.