XIRR Guessing Games and Distribution Waterfalls
Business Law Today, January 2016
8 Pages Posted: 28 Jan 2016
Date Written: January 26, 2016
Distribution waterfalls in partnership and LLC agreements often incorporate IRR hurdles. Many of those agreements define IRR with reference to Microsoft Excel’s XIRR function. That function, if given the correct inputs, can guess an IRR with impressive accuracy. When repurposed to compute IRR hurdles, however, the XIRR function can be considerably less accurate. The function’s failure in this context can turn computing distribution requirements into a guessing game. This article illustrates how the XIRR function can create problems and proposes a better, direct way to define IRR for purposes of computing IRR hurdles.
Keywords: Partnership, profit allocation, distribution waterfall, time value of money, IRR, XIRR, net present value, future value, internal rate of return, hurdle rate, IRR hurdle, preferred return
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