What financial appraisal metric measures the efficiency of an investment?

The Internal Rate of Return (IRR) is a key financial appraisal metric that quantifies the efficiency of an investment by calculating the annualized rate of return expected to be generated by the project or investment, assuming that cash flows are reinvested at the IRR. It represents the discount rate that makes the net present value (NPV) of all cash flows from the investment equal to zero.

By comparing the IRR to the required rate of return or hurdle rate, investors can assess whether the investment is likely to meet their return expectations. A higher IRR suggests a more efficient investment, as it indicates that the project is expected to generate greater returns relative to its costs. Furthermore, because IRR considers the timing and scale of cash flows, it provides a comprehensive measure of an investment's potential efficiency compared to simpler metrics.

Other financial metrics mentioned, such as Debt Service Coverage Ratio (DSCR), Loan to Value (LTV), and Yield Sensitivity Analysis, serve different purposes. DSCR focuses on the ability to cover debt obligations rather than pure investment efficiency. LTV provides a measure of the amount of leverage being used in relation to the property value, which does not directly relate to returns on the investment itself. Yield Sensitivity Analysis