Which metric explicitly accounts for the time value of money and is commonly used to compare different exit scenarios?

• A. MOIC
• B. IRR
• C. Gross revenue
• D. EV/EBITDA

Answer: (B)

Internal rate of return is the measure that explicitly accounts for the time value of money. It’s the discount rate that makes the net present value of all cash flows from the investment—initial outlay, interim distributions, and final exit—equal to zero. Because it incorporates when cash is received, IRR lets you compare different exit scenarios on an apples-to-apples basis, even if their sizes and timing differ. In private equity, the timing of returns matters as much as the amount, so IRR reflects both how much you earn and when you earn it. Other metrics either ignore timing (like MOIC, which looks at total cash returned without regard to when it arrives) or focus on company valuation rather than investor-specific returns (gross revenue is a top-line figure; EV/EBITDA is a valuation multiple, not a measure of realized returns over time). That combination of timing and return makes IRR the best choice for comparing exit scenarios.