What does the IRR take into account that cash-on-cash return does not?

The internal rate of return (IRR) takes into account the time value of money (TVM), which is a fundamental concept in finance. The time value of money recognizes that a dollar today is worth more than a dollar in the future due to its potential earning capacity. In contrast, cash-on-cash return looks solely at cash inflows relative to cash invested during a specific period, without considering how the timing of those cash flows affects their value.

This means that IRR evaluates the performance of an investment by calculating the rate at which the present value of future cash flows equals the initial investment, considering when those cash flows occur. Because IRR incorporates the timing of cash flows, it provides a more comprehensive picture of an investment's profitability over time compared to cash-on-cash return, which does not adjust for the timing and therefore may not fully reflect the potential value generated by an investment.