IRR and MOIC, calculated and compared
MOIC (multiple on invested capital) is the cash an investor gets back divided by the cash it put in. IRR is the yearly rate that makes the present value of those cash flows zero, so it also counts when the money moved. With one investment and one exit, IRR = MOIC^(1 ÷ years) − 1: $100 million that becomes $250 million in 5 years is 2.50x and 20.1% a year. Soreno, an AI voice interview practice app for consulting, investment banking and other finance candidates, runs a free NPV and IRR calculator with no sign-up, and mock private equity interviews where an AI interviewer asks for returns in your head.
Updated
- MOIC is how much. Cash back ÷ cash in. Time doesn't enter it.
- IRR is how fast. The yearly rate that sets the cash flows' present value to zero.
- Early cash lifts IRR. A dividend in year 2 can raise IRR while barely moving MOIC.
- Gross is not net. Fees and carried interest sit between a deal's return and an investor's.
- Twelve questions below. Short answers in our words and the follow-ups to expect.
IRR and MOIC in three examples
One invented deal, three ways. A sponsor puts $100 million of equity into a company. Cash flows happen at year ends, and years are counted from the day the equity goes in. These are our conventions for the examples, and every number is computed in code.
Example 1: one check in, one check out2.50x, 20.1%
1. MOIC
2.50x
$250 million back ÷ $100 million in = 2.50x.
2. IRR
20.1%
With one cash flow each way, IRR = 2.5^(1 ÷ 5) − 1 = 20.1%. Check: $100 million × 1.201^5 returns about $250 million.
3. Change the hold
35.7% over 3 years, 14.0% over 7
The same 2.50x is 35.7% a year over three years and 14.0% over seven. MOIC doesn't move. That is the whole difference between the two measures.
4. In your head
Use pairs you know
2x in five years is about 15%, 3x about 25%. Our paper LBO guide has the full table and the rules of 72 and 115.
Paper LBO examples and the IRR table
Example 2: a dividend in year 22.60x, 26.2%
Now the company borrows and pays the sponsor a $60 million dividend at the end of year 2. The extra debt means a smaller exit: the sponsor gets $200 million at the end of year 5.
1. MOIC
2.60x
($60 million + $200 million) ÷ $100 million = 2.60x. Cash adds up, whenever it arrives.
2. IRR
26.2%
Three cash flows, so solve for the rate: −100 today, +60 in year 2, +200 in year 5. The answer is 26.2%. Excel's IRR on −100, 0, 60, 0, 0, 200, one cell per year, gives the same.
3. Why it's higher
21.1% if the same cash came at the end
The same $260 million all at exit would be 21.1%. Getting $60 million back three years early is worth more than its face amount to IRR.
4. Break-even exit
$146 million
With the dividend, an exit of just $146 million would match example 1's 20.1%. The recap raised the IRR here because the exit fell by $50 million, less than the $104 million the dividend grows to by year 5 at 20.1%.
5. The catch
IRR assumes reinvestment
IRR is often explained as if the $60 million kept earning the IRR until year 5. If the investor can only reinvest it at less, its compound return to year 5, a modified IRR, is below 26.2%. A strong answer says so.
Example 3: gross versus net, and a credit lineNet 2.02x, 15.8%
Example 1's deal sits in a fund. Our simplified terms: investors pay a 2% yearly management fee on the $100 million at each year end, and the general partner takes 20% of the profit as carried interest. Many funds add a hurdle and a catch-up. With a full catch-up the general partner still ends with 20% of the profit once returns clear a hurdle such as 8% a year, as they do here.
1. Paid in
$110 million
$100 million for the deal + $2 million of fees × 5 years = $110 million.
2. Carry
$28 million
Profit = $250 million − $110 million = $140 million. 20% of it is $28 million, so investors receive $222 million.
3. Net returns
2.02x and 15.8%
Net MOIC = $222 million ÷ $110 million = 2.02x. Net IRR on −100 today, −2 each year, +222 at year 5 is 15.8%, against 2.50x and 20.1% gross.
4. A subscription line
2.38x but 24.2%
Suppose instead the fund borrows the $100 million on a credit line at 5% and calls investors' money a year later to repay it: $105 million. On the gross cash flows, MOIC falls to $250 million ÷ $105 million = 2.38x, and IRR rises to 24.2%, because the clock starts a year later.
5. Say it
Which number for which question
MOIC answers how much money was made, IRR how fast. Net answers what an investor got. When a figure jumps, ask what changed the timing.
From SEC staff: marketing rule FAQ (extracted performance) and IRS: section 1061 reporting guidance FAQs.
What the interviewer checks on returns
In our experience the math is quick and the follow-ups test whether you understand what each number rewards.
Mental math
A multiple and a hold period into an IRR within a few points, without a calculator.
The trade-off
A quick 1.5x can beat a slow 2.5x on IRR and lose on MOIC. Say which a fund would prefer and why.
Timing tricks
Dividend recaps and credit lines move IRR more than MOIC. Spot them.
Whose return
Deal-level gross returns differ from what investors get after fees and carry.
12 IRR and MOIC interview questions
The short answers are ours. The note says what else a strong answer covers.
The two measures4 questions
What is the difference between IRR and MOIC?
Show follow-ups
Short answer. MOIC is total cash back over cash in. IRR is the yearly rate that sets the cash flows' present value to zero. MOIC ignores time, IRR doesn't.
Gives a pair where they disagree, such as 2x in 2 years against 3x in 6. Practice it, see a model answer
Would you rather have 2x in 3 years or 3x in 6?
Show follow-ups
Short answer. 2x in 3 years is about 26%, 3x in 6 years about 20%. On IRR the first wins, on money made the second. It depends on what the fund can do with the cash after year 3.
Names fund life and reinvestment as the tie-breakers.
How do you calculate IRR without a calculator?
Show follow-ups
Short answer. Know a few pairs: over five years, 2x is about 15%, 2.5x about 20%, 3x about 25%. Then adjust for the hold and say you are approximating.
Checks the answer by compounding back.
Where do the returns in an LBO come from?
Show follow-ups
Short answer. EBITDA growth, a higher exit multiple and paying down debt with the company's cash.
Puts a rough share on each for a given deal. Practice it, see a model answer
In a deal4 questions
Walk me through a paper LBO.
Show follow-ups
Short answer. Price, sources and uses, cash flow and debt paydown, exit value, then MOIC and IRR.
Ends on both numbers and how they would change with one more year. Practice it, see a model answer
What happens to returns if the exit multiple is one turn lower?
Show follow-ups
Short answer. Exit equity falls by one turn of exit EBITDA, all of it at the equity's expense, so MOIC falls more in percentage terms than the enterprise value does.
Works it through on numbers. Practice it, see a model answer
How do you back into the most a sponsor can pay for a 20% IRR?
Show follow-ups
Short answer. Work out exit equity, discount it at 20% for the hold, add the debt the deal can carry, and that is the price.
Says the MOIC the 20% implies over that hold. Practice it, see a model answer
What is a dividend recapitalization, and why would a firm do one?
Show follow-ups
Short answer. The company borrows to pay the sponsor a dividend. Cash comes back early, which lifts IRR, at the cost of more debt.
Says what happens to MOIC. Practice it, see a model answer
Fund level4 questions
What is the difference between gross and net IRR?
Show follow-ups
Short answer. Gross is the deal's return. Net is what the fund's investors earn after management fees, expenses and carried interest.
Puts a number on the gap with a quick example.
How can a credit line raise a fund's IRR?
Show follow-ups
Short answer. The fund invests with borrowed money and calls investors' capital later, so their money is out for less time. IRR rises, and MOIC dips by the interest.
Says why investors look at both numbers for that reason.
Can IRR be misleading?
Show follow-ups
Short answer. Yes. It rewards speed even on small gains, says nothing about what interim cash earns after it comes back, and can have more than one answer when cash flows change sign twice.
Pairs it with MOIC as the check.
How does a private equity firm exit an investment?
Show follow-ups
Short answer. A sale to a strategic buyer, a sale to another sponsor, an IPO, or a recap that returns part of the money.
Links each exit to its effect on timing and IRR. Practice it, see a model answer
More to prepare with
Common IRR and MOIC mistakes
Dividing MOIC by the years
2.50x over five years is not 30.0% a year. Compounding makes it 20.1%.
Adding interim cash at face value to IRR
A dividend counts in full for MOIC, but for IRR it counts by when it came.
Quoting gross as net
In example 3 the deal's 2.50x is 2.02x to investors.
Forgetting fees in the equity check
If deal fees are paid with equity, the money in is larger and both measures fall.
Ignoring the hold
A higher IRR on a two-year flip can mean less money made than a slower deal.
Do the returns math out loud
Soreno's AI interviewer gives you a deal, asks for the multiple and the IRR without a calculator, then asks what a recap or a shorter hold would do. You get a scored report on your answer.
Questions people ask
How do you calculate MOIC?
Total cash returned, plus the value of anything still held, divided by the total cash invested. 250 back on 100 in is 2.5x.
What is the IRR formula?
The rate r that makes the sum of each cash flow ÷ (1 + r)^t equal zero. With one cash flow in and one out, it simplifies to MOIC^(1 ÷ years) − 1.
Is MOIC the same as cash-on-cash return?
In interviews the terms are used the same way: cash out over cash in. Funds also report TVPI, which counts the value of unsold holdings.
What is a good IRR for private equity?
Interview prompts often use 20% to 25% as a target, which is a common convention in practice questions rather than a rule. Say what you assume.
Can a fund advertise one deal's gross IRR?
Under the SEC's marketing rule, the staff says an adviser that shows the gross performance of one investment or a group of them in an advertisement must also show its net performance, although the staff says it would not recommend enforcement action if the extract is clearly labeled gross and the total portfolio's gross and net performance is shown with at least equal prominence.
Why do some funds avoid exiting in under three years?
Partly tax. The IRS says section 1061 generally requires a capital asset to be held for more than three years for gain allocated to a carried interest to count as long-term capital gain.
How do I calculate IRR in Excel?
Put the cash flows in order, with the investment as a negative number, and use =IRR(range) for evenly spaced years or =XIRR(values, dates) for exact dates.