Use the following information to answer the question(s) below.

Suppose that Galt Ventures, 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 Galt's management fee. As is typical in the venture capital industry, Galt 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. Galt also charges 20% carried interest on the profits of the fund (net of management fees). Assume that Galt collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Galt collects all proceeds from its investments at the end of the ten-year life.

-The IRR on the investments made by Galt Ventures is closest to:

Question

Use the following information to answer the question(s) below.

Suppose that Galt Ventures, 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 Galt's management fee. As is typical in the venture capital industry, Galt 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. Galt also charges 20% carried interest on the profits of the fund (net of management fees). Assume that Galt collects the $250 million of committed capital and invests $200 million of it immediately. Also assume that Galt collects all proceeds from its investments at the end of the ten-year life.

-The IRR on the investments made by Galt Ventures is closest to:

Quizplus · Accepted Answer

To calculate the IRR, we need to find the present value of all cash flows generated by the fund and set it equal to zero. The cash flows consist of the initial investment (-$200 million), the management fees (-$55 million), the carried interest on profits (-$100 million), and the final investment value (+$800 million). 
To estimate the management fees, we can simply multiply the committed capital by the fee rate and the number of years: 2% x $250 million x 10 = $50 million. 
To estimate the carried interest, we need to calculate the profits of the fund net of management fees, and then apply the 20% rate: 20% x ($800 million - $55 million - $200 million) = $109 million. 
Therefore, the total cash flows are: -200 + (-50 x 10) + (-109) + 800 = $441 million. 
Using a financial calculator or spreadsheet, we can find that the IRR of these cash flows is approximately 14.9%. Option C is the closest answer.

Use the Following Information to Answer the Question(s) Below