Compare IRR, NPV, and equity multiple for evaluating real estate investments. Which statement correctly describes each?

• A. IRR is the present value of cash flows minus investment.
• B. NPV is the annualized rate of return including cash flows reinvested.
• C. Equity multiple is IRR.
• D. IRR is the annualized rate of return including cash flows reinvested; NPV is the present value of cash flows minus investment; equity multiple is total cash inflows divided by equity invested (non-annualized).

Answer: (D)

This question tests how IRR, NPV, and equity multiple describe different aspects of a real estate deal. IRR is the annualized rate of return that makes the net present value of all cash flows (including the initial investment) equal to zero, and it implicitly assumes you reinvest interim cash flows at the IRR. That reinvestment assumption is why describing IRR as the annualized return with reinvested cash flows fits. NPV, on the other hand, is a dollar value: the present value of all future cash inflows minus the initial investment. It tells you how much value a project adds today using a given discount rate, not a rate itself. Equity multiple measures the total cash inflows from the investment relative to the equity invested, and it’s a non-annualized ratio (cash-in, cash-out without time weighting). So the statement that best describes each is: IRR as the annualized rate with reinvested cash flows; NPV as the present value of cash flows minus the initial investment; and equity multiple as total cash inflows divided by equity invested (non-annualized).