IRR Calculations

Question 1

How do you calculate the IRR in an LBO model, and what does it mean?

Answer 1

The effective annual compounded interest rate

IRR = (exit proceeds / Investor Equity) ^ (1/# of Years) - 1

Question 2

How can you quickly approximate the IRR in an LBO? Are there any rules of thumb?

Answer 2

Double your money in 3 years - 25%
Double your money in 5 years - 15%
Triple your money in 3 years - 45%
Triple your money in 5 years - 25%