Differentiate between equity multiple and IRR as investment metrics for commercial properties.

• A. Equity multiple = total cash received divided by total cash invested; IRR = the discount rate that makes NPV zero
• B. Equity multiple accounts for timing of cash flows; IRR ignores timing
• C. Equity multiple equals IRR; IRR equals ROI
• D. Equity multiple is a measure of annual return; IRR is not a rate of return

Answer: (A)

The key idea is to compare two different ways to measure investment performance: the equity multiple and IRR. Equity multiple is a simple measure of total cash returned relative to cash invested. You divide all cash you receive by all cash you invested, giving a multiple that shows how many times your initial equity is returned over the life of the investment. It tells you the overall scale of return but ignores when those cash flows happen, so it can be misleading if two deals have the same multiple but very different timelines or risk.

IRR, by contrast, accounts for the timing of every cash flow. It is the discount rate that makes the net present value of all cash flows equal to zero, effectively encoding both how much is earned and when it is earned into a single annualized rate. This makes IRR sensitive to when money comes in and goes out, which is crucial for understanding the true efficiency of a property investment over time.

Thus, the statement that equity multiple is total cash received divided by total cash invested and IRR is the discount rate that yields zero NPV captures the essential distinction: EM measures total cash returned without time value, while IRR incorporates the timing of cash flows as a rate of return. The other ideas confuse timing or equate these metrics with other concepts like ROI or annual return, which isn’t accurate.