Which method provides an annualized rate of return?

The internal rate of return (IRR) is a method that calculates the annualized rate of return on an investment, taking into account the timing of cash flows. It represents the discount rate at which the net present value (NPV) of all cash flows (both inflows and outflows) from the investment equals zero. Consequently, IRR effectively measures the profitability of investments over time, allowing investors to assess potential returns on a consistent annualized basis.

When using IRR, the timing and scale of cash flows are important factors, as they influence how returns are realized over the life of an investment. This annualization is key to comparing different investment opportunities, particularly those with varying project durations and cash flow patterns. Therefore, IRR not only reflects the overall return but also translates it into an annualized rate, making it a valuable metric for investment analysis.

The other methods discussed, while useful for specific financial analyses, do not provide a direct annualized rate of return to the same extent as IRR. Cash-on-cash return measures the cash income generated by the investment relative to the cash invested but does not consider the timing of cash flows. Book value return focuses on the changes in asset values without factoring in the time value of money