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# How to Calculate Cash on Cash Return Private Equity

Original post by Edriaan Koening of Demand Media

Private equity refers to a method of obtaining business funds from private investors instead of from lending institutions. These private investors provide cash to businesses in hopes of getting a healthy return on their investment. Because these private investors need cash to keep doing business and making money, they often think in terms of cash. Cash-on-cash return measures the amount of cash an investment generates when compared to the amount of initial cash investment. This helps private equity lenders determine the profitability of their investments.

## Contents

### Step 1

Calculate the amount of revenues generated by a certain investment over a year. For example, if an investment provides \$5,000 per month in revenues, then the annual revenues are \$60,000. Take the before-tax figure for this calculation.

### Step 2

Find out the amount of the initial cash investment. For example, if the private investor lent \$600,000 to the business that generates the revenues, then the initial cash investment is \$600,000.

### Step 3

Divide the annual cash revenues by the initial cash investment to get the cash-on-cash return. For example, with an annual cash flow of \$60,000 and an initial investment of \$600,000, the project has a cash-on-cash return of 10 percent (\$60,000/\$600,000).

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