Q: “I have a case study interview next Monday; I will be asked to calculate the cash flows necessary to meet a certain IRR hurdle rate. Can you please provide me with instructions as to how to do so – cant seem to find a succinct answer online!”
A: The math is fortunately pretty straightforward for this calculation. I believe what throws people off is that an IRR is often explained as the rate that makes the net present value of all cash flows equal to zero. On account of this definition people think about working backwards from the cash flows received. But it can also be thought of as the annualized effective compounded return rate. This language makes it easier to think about growing an investment (cash outflow) by an annual rate of return to achieve an outcome.
In other words, if you are provided an IRR of 20% and asked to determine the proceeds achieved in year 5, the result is simple: Your investment will grow by 20% for 5 years.
(1 + 20%)(1 + 20%)(1 + 20%)(1 + 20%)(1 + 20%)
(1 + 20%)^5
This works out to 2.49. So you can take the dollars invested, and multiply by 2.49 to determine the proceeds required to achieve an IRR of 20% over 5 years.
Assuming you invested X dollars, the proceeds required to achieve an IRR of 20% over 5 years is as follows:
X*(1 + 20%)^5
Please see video for additional detail: