The Exit Multiple and IRR are two effective but very different ways of quantifying the return of an investment. Exit multiple is a very simple calculation. It is the total cash out divided by the total cash in. So if you put $50,000 in and got $150,000 back, your exit multiple would be 3X.
IRR stands for “internal rate of return” and is a more complicated way of looking at your returns which takes elapsed time into account. In terms of how to calculate IRR, think of it as follows: the internal rate of return on an investment is the annualized effective compounded return rate or rate of return that would be required to make the net present value of the investment’s cash flows (whether they be cash in or cash out) equal out to a perfect ZERO. The actual equation is sometimes expressed like this: NPV = NET*1/(1+IRR)^year). IRR can also be thought of as that particular discount rate at which the present value of future cash flows become equal to the original investment (or put another way, the rate of return necessary for the investment to break even). In the investment context, the IRR of your investment is the discount rate at which the net present value of your investment’s costs (the negative cash flows) is equal to the net present value of your investment’s returns (the positive cash flows).
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