Which statement best describes IRR vs Cap Rate?

• A. IRR is the internal rate of return considering timing of all cash flows; Cap Rate is a single-year metric using NOI and value
• B. Cap Rate is a synonym for IRR
• C. IRR measures timing of cash flows; Cap Rate uses NOI and value
• D. IRR ignores the timing of cash flows

Answer: (C)

The main idea is distinguishing time value from a single-year yield. IRR is about when money comes in and goes out across the entire holding period: it finds the rate that makes the net present value of all cash flows (both inflows and outflows) equal to zero, so it inherently reflects the timing and size of every payment over years. Cap rate, on the other hand, is a one-year snapshot: you take that year’s net operating income and divide it by the property's value. It gives a rough yield estimate for that moment in time and doesn’t account for when cash flows occur within the year or how they unfold over multiple years. So describing IRR as measuring the timing of cash flows and Cap Rate as using NOI and value captures the essential distinction between a multi-period, time-value metric and a single-year, value-based metric.