What Is the Internal Rate of Return (IRR)?
Answer
The internal rate of return is the annualized return that accounts for the timing of every cash flow over a deal’s life. It is the discount rate at which the net present value of all cash flows equals zero, a single figure that rewards getting money back sooner.
Because IRR is time-weighted, a deal that returns capital earlier can post a higher IRR than one returning the same total later. It is powerful but incomplete: a high IRR over a very short hold can mean little total profit, which is why the equity multiple is reported alongside it.
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