What do both cash-on-cash return and IRR measure?

The correct choice highlights the relationship between the capital invested by the financial sponsor and the capital that is returned from the investment. Cash-on-cash return specifically calculates the annual return generated on the invested cash, providing an immediate measure of the equity performance relative to actual cash outflows and inflows.

Similarly, the Internal Rate of Return (IRR) assesses the profitability of an investment by determining the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) equals zero. This means IRR reflects the rate of return expected on the initial capital investment over time, essentially linking the amount of capital invested to the cash flows that are generated and returned.

Both metrics are essential for investors as they reflect how well their capital is being utilized and the efficiency of their investments. By understanding these metrics, investors can make informed decisions on the viability and potential profitability of their investment opportunities.