Explain the difference between IRR and MOIC, and when each is most informative for evaluating a private equity investment.

• A. IRR is the annualized internal rate of return that accounts for the timing of cash flows; MOIC is the total cash returned divided by invested capital. Use IRR to compare deals with different holding periods and cash flow timing; use MOIC to gauge the scale of value creation and absolute return.
• B. MOIC is the annualized internal rate of return; IRR is the total cash multiple.
• C. IRR and MOIC measure the same thing and should be used interchangeably.
• D. IRR ignores the time value of money; MOIC accounts for time value.

Answer: (C)

IRR measures the annualized rate of return on an investment by accounting for when money goes in and comes out. It’s the discount rate that makes the net present value of all cash flows zero, so timing matters a lot. MOIC, or money-on-invested-capital, is simply the total cash returned divided by the amount invested—it's a cash multiple and does not consider when those cash flows occur.

Because IRR incorporates timing, it’s most informative when you’re comparing deals with different holding periods or cash-flow patterns. It tells you how efficiently capital is being earned over time. MOIC, on the other hand, gauges the scale of value creation—the absolute multiple of your invested capital—without regard to how long it took, which can be useful for understanding the magnitude of returns at a glance.

Keep in mind that IRR can be sensitive to the timing and may assume reinvestment at the same IRR, while MOIC ignores duration and risk. In practice, both metrics are used together: use IRR to compare timing and performance across deals, and MOIC to assess how much money was created relative to the investment.