Chapter 4 Quantitative Foundations: NPV, IRR, and the Cash Flow Waterfall

Question 1

IRR

Answer 1

Measures return on three or more cash flows and can be either dollar weighted or time weighted

Question 2

Time Weighted

Answer 2

Based on a hypothetical $1 investment with no intervening additions or withdrawals or principal

Question 3

Money Weighted

Answer 3

Based on actual cash flows, which may include intervening additions or withdrawals of principal.

Question 4

Point-to-Point

Answer 4

Valuation at some starting date, valuation at some ending date (usually the latest available), and intervening cash flows.

Question 5

Since Inception

Answer 5

Cash flow applies to a fund, in which case the cash flows included may predate the investor’s investment in the fund.

Question 6

Lifetime Time Line

Answer 6

Gather up all cash flows, including the cash outflow required to make the initial investment, subsequent investments (delayed investment is common in some types of private equity funds).

Question 7

Catch-Up Rate

Answer 7

A higher share of the incremental return until the manager’s incentive fee on the hurdle return has been paid.