Why IRR > WACC & not TWR > WACC
Was solving some problems related to annualizing returns and I had the following scenario:
I borrow $100 and invest it, and I get the following results:
Year 1: 15% Return –> Ending CF: 115
Year 2: -10% Return –> Ending CF: 103.5
Year 3: 5% Return –> Ending CF: 108.7
Solving for the Geometric Mean, I get 2.81%. Now, assuming I borrowed that $100 at a 1% cost of capital, I would make profit as follows (correct me if I’m wrong, as I usually am).
Year 1 Total Debt owed: 100*(1+1%) => $101
Year 2 Total Debt owed 101(1+1%) =>$102
Year 3 Total Debt owed 102(1+1%) =>$103
So, why cant the rule by TWR > WACC => Good investment.
Am I missing anything? Moreover, when I attempt to do IRR with these figures, I get a huge percentage!
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