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Why IRR > WACC & not TWR > WACC

Hey all,

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!

Thank you. 

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TWR does not take into consideration the addition or withdrawal of funds. TWR would stay the same if you added 1000 in start of y2 and withdrew before y3. You would have lost a bundle, but TWR would exceed WACC….and try that IRR thing again. Tell me what you got and I’ll try to figure out where you went wrong.