Question

What are the advantages of evaluating fund performance based on IRR? Why would an investor prefer to evaluate a fund based on cash-on-cash return?

Answer 1

The advantages of evaluating fund performance based on IRR:

1. The main advantage of the usage of IRR method is that it reflects the return on the original money invested.
2. The time value of money is taken into account as the cash flow are given equal weights and the timing of cash flows in all future years is considered.
3. The IRR method does not consider the hurdle rate, which is quite a subjective figure and based on rough estimates.
4. The IRR method is simple to use.

Advantages of evaluating a fund based on cash-on-cash return:

1. It is easy to calculate.

2. It helps to determine the highest cash return between various investment options.

Mostly, the funds are not evaluated on cash-on cash return as it does not considers the time value of money.