Are going to be really numbers, and the smallest real root is the IRR, so
that's really great, so what do these sorts of things look like?
They look like cash flow diagrams for lenders, basically but
this here looks more like a cash flow diagram for a developer,
or a sponsor, or what we call the equity participant in a project.
Where maybe they have to invest in phase one, and then phase one comes, so
online and they make some money but now they've got to invest in phase two.
And then, phase two comes online and they make more money, so they have positive and
negative cash flows throughout the project.
And mathematically, we can't say anything about the math required or
the numerical methods required to solve these, so
in a case like this use NVP, why?
NVP always works, NVP is the word, the light, and the way.
Okay, so IRR works very well For
bond projects and loan projects and in the bond world,
when folks are talking to you about yield to maturity, all they mean is IRR.
Kind of a funny IRR, IRR of the project buy the bond
where they evaluate with non-risk-adjusted cash flows.
Anyway, yield to maturity a certain type of IRR that folks in the bond world use.
All right, so
let's apply the IRR method to our distressed Seller problem.
Remember our mission?
Invest in very safe stuff, that is short duration, something like treasuries.
Based on that, we went out and
found that a diversified portfolio of that type of investment,
we would expect to return excuse me, 5% annually.
So that's going to be our opportunity cost of capital and
distressed seller then comes along and says.
For 100 bucks I'll give you a treasury bond,
and the Treasury will pay you in one year $110.
Okay, so how are we going to apply this?
We're just going to apply the internal rate of return formula,
we want to say that find this number, solve for this.