IRR and Cash Multiple

While the NPV method is the most reliable method when evaluating a transaction like Kleiner Perkin’s acquisition of Ideko, real-world practitioners often use IRR and the cash multiple (or multiple of money) as alternative valuation metrics. We discuss both here.

To compute the IRR, we must compute Kleiner Perkin’s cash flows over the life of the transaction. Kleiner Perkin’s initial investment in Ideko, (Ideko - Acquisition Financing), is $53 million. Kleiner Perkins will then receive cash dividends from Ideko based on the free cash flow to equity reported in (Ideko - Forecast FCFs). Finally, we assume that Kleiner Perkin’s will sell its equity share in Ideko at the end of five years, receiving the horizon equity value.

We combine these data to determine Kleiner Perkin’s cash flows in the spreadsheet below:


Given the cash flows, we compute the IRR of the transaction, which is 33.3%. While an IRR of 33.3% might sound attractive, it is not straightforward to evaluate in this context. To do so, we must compare it to the appropriate cost of capital for Kleiner Perkin’s investment. Because Kleiner Perkins holds an equity position in Ideko, we should use Ideko’s equity cost of capital. Of course, Ideko’s leverage ratio changes over the five-year period, which will change the risk of its equity. Thus, there is no single cost of capital to compare to the IRR.

The spreadsheet above also computes the cash multiple for the transaction. The cash multiple (also called the multiple of money or absolute return) is the ratio of the total cash received to the total cash invested. The cash multiple for Kleiner Perkin’s investment in Ideko is:

\[\begin{align*} & \text{Cash Multiple } = \text{Total Cash Received} / \text{Total Cash Invested} \end{align*}\] \[\begin{align*} = {9054 + 2989 + 4736 + 1375 + 177,077 \over {53,000}} = 3.7 \end{align*}\]

That is, Kleiner Perkins expects to receive a return that is 3.7 times its investment in Ideko. The cash multiple is a common metric used by investors in transactions such as this one. It has an obvious weakness: The cash multiple does not depend on the amount of time it takes to receive the cash, nor does it account for the risk of the investment. It is therefore useful only for comparing deals with similar time horizons and risk.