Disadvantage of Irr
Disadvantage of Irr
The first disadvantage of IRR is that it is an investment decision tool. Therefore, it should not be used to rate mutually exclusive projects, but only to decide whether a single project is worth investing in. Secondly, IRR overstates the annual equipment rate of return for a project whose interim cash flows are reinvented at a rate lower than the calculated IRR. Lastly, it does not consider the cost of capital and it should not be used to compare projects of different duration. For an instance, positive cash flows followed by negative ones and then by positive ones, the IRR may have multiple values.
Net Present Value is a theoretically method and does permit a defer factor for the investment of a project. It only accept or reject a project in the current term and does not have future strategies to ambiguity in market place.
Though NPV method is easy to use, it is quite difficult to obtain the estimates of cash flows due