What is the Internal Rate of Return (IRR)?

• A. Annual rate of return
• B. Average cash-on-cash return
• C. Total investment multiple
• D. Leveraged IRR

Answer: (A)

IRR is the annualized discount rate that makes the net present value of all cash flows from an investment equal to zero. In other words, it converts every cash inflow and outflow over time into a single percentage that reflects the return you’re effectively earning, taking into account when each cash flow occurs. This is why IRR is described as an annual rate of return: it summarizes the time‑weighted performance of the investment as if you earned that rate each year, assuming interim cash flows are reinvested at the same rate. It’s more precise than a simple average or total cash multiple because it hinges on the timing of every cash flow, not just the totals. The other metrics mentioned measure different ideas—cash-on-cash return looks at cash earned relative to cash invested without considering timing, investment multiple sums cash inflows into a whole multiple, and leveraged IRR refers to IRR calculated with debt financing rather than the basic definition.