Investment A: EBITDA of $10 million, entry multiple of 5x, capex of $5 million. Investment B: EBITDA of $10 million, entry multiple of 8x, capex of $1 million. Which investment should you choose?

• A. Investment A
• B. Investment B
• C. Neither investment
• D. Both investments yield the same return

Answer: (B)

The key idea is that returns come from both what you pay upfront and the cash the business generates afterward. With EBITDA fixed at 10 million for both deals, the upfront valuations differ: one is 10 million × 5x = 50 million, the other is 10 million × 8x = 80 million. But the ongoing cash flow after reinvestment into the business (capex) matters a lot: free cash flow equals EBITDA minus capex. That yields 5 million per year for the cheaper deal (10 − 5) and 9 million per year for the more expensive deal (10 − 1). If you assume exits scale with the same EBITDA and multiples (so the higher-priced deal also exits at a higher value), the higher ongoing cash flow of the second option, together with its larger exit value, tends to produce a better overall return (higher IRR or MOIC) despite the higher initial price. In short, the investment with the 8x entry multiple and only 1 million in capex delivers more free cash flow and, combined with a higher exit value, yields the better return.