Understanding Internal Rate of Return (IRR) in Private Equity

Very Easy Private Equity Valuation Performance Measurement

Private equity investments are often assessed using various performance metrics to evaluate their success and profitability. One widely used measurement is the Internal Rate of Return (IRR), which helps investors understand the total return of their investment over time.

In the context of private equity, which of the following statements best describes the Internal Rate of Return (IRR) as a measure of performance?

The IRR provides a measure of the annualized rate of return where cash flows are discounted back to their present value.

The IRR does not take into account the timing of cash flows, focusing only on the total amount invested.

The IRR is only useful for comparing investments with equal cash flow patterns.

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