In an example where the deal yields a 2.5x exit multiple over 5 years, what approximate IRR would you expect?

In an example where the deal yields a 2.5x exit multiple over 5 years, what approximate IRR would you expect?

• A. 5%
• B. 15%
• C. 25%
• D. 20%

Answer: (D)

IRR is the annualized return that turns the initial investment into its final value over the holding period. If you start with 1 and end at 2.5 after 5 years with no cash flows in between, the rate r satisfies (1 + r)^5 = 2.5. Solving gives 1 + r ≈ 2.5^(1/5) ≈ 1.201, so r ≈ 0.201, about 20%. Thus the approximate IRR is 20%. The other options would imply different final multiples over five years (for example, 5% would yield about 1.28x, 15% about 2.01x, and 25% about 3.05x), not 2.5x.

IRR is the annualized return that turns the initial investment into its final value over the holding period. If you start with 1 and end at 2.5 after 5 years with no cash flows in between, the rate r satisfies (1 + r)^5 = 2.5. Solving gives 1 + r ≈ 2.5^(1/5) ≈ 1.201, so r ≈ 0.201, about 20%.

Thus the approximate IRR is 20%. The other options would imply different final multiples over five years (for example, 5% would yield about 1.28x, 15% about 2.01x, and 25% about 3.05x), not 2.5x.