Question

Use the following information to answer the question(s) below.Suppose that Halcyon Capital, a venture capital firm, raised $250 million of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay Halcyon's management fee. As is typical in the venture capital industry, Halcyon will only invest $200 million (committed capital less lifetime management fees). At the end of 10 years, the investments made by the fund are worth $800 million. Halcyon also charges 20% carried interest on the profits of the fund (net of management fees). Assume that Halcyon collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Halcyon collects all proceeds from its investments at the end of the ten-year life.


The IRR on the investments made by Halcyon Capital is closest to ______%.

• A. 12.4
• B. 15.8
• C. 9.9
• D. 14.9

Answer 1

Halcyon will only invest $200 million

Capital outflow at beginning = 200 mil

At the end of 10 years, the investments made by the fund are worth $800 million

Capital inflow at 10 years = 800 mil

We know that IRR is the rate at which The NPV is zero

Let the IRR be R

present value of cash inflow = 800/ ( 1+ R)^10

Here, 800/ ( 1+ R)^10 - 200 = 0

or , ( 1+ R)^10 = 4

Solving for R we get , (1+R) = 1.1487

Hence R or IRR = 0.1487 or 14.87 %

The closest value is 14.9% option D