In real estate modeling, which statement best describes IRR compared to equity multiple?

• A. It ignores the timing of cash flows.
• B. It does not require a discount rate.
• C. It depends only on total cash flows, not the order.
• D. It accounts for the timing and discounting of cash flows.

Answer: (D)

IRR captures the time value of money by using a rate that discounts future cash flows back to their present value, solving for the rate that makes the net present value zero. Because it discounts cash flows, the timing of when money comes in matters a lot: earlier inflows carry more weight in determining the IRR than later ones. Equity multiple, by contrast, sums all cash inflows and divides by the initial equity, so it ignores when those cash flows occur and depends only on the total amount returned relative to what was invested.

So the statement that best describes IRR in relation to equity multiple is that IRR accounts for both the timing and discounting of cash flows. The other statements are misleading: IRR does not ignore timing; it inherently depends on when cash flows occur, not just their total amount. It does involve discounting as part of defining the rate that sets NPV to zero. And it does not ignore the order and timing of cash flows, unlike equity multiple which treats all cash flows as if timing didn’t matter.