From the course: Investment Evaluation

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Pros and cons of IRR

Pros and cons of IRR - Microsoft Excel Tutorial

From the course: Investment Evaluation

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Pros and cons of IRR

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- I really like IRR for its simplicity, at least when the project investment structure's simple. There are no difficult formulas, and it gives a really good metric that you can compare against other projects that you're considering. I also like it, because it ignores a lot of the guessing. For example, you don't have to worry about what the whack discount rate is. So the risk of calculating it is immediately mitigated. Of course, I also love that IRR takes into account the time value of money, which results in each cash flow being given an equal weight. However, its simplicity also limits its scope. For example, there's no parameter for the size of the project. A project with 100000 dollar overhead cost and projected cash flows of 25000 dollars in the next five years has an IRR of 7.94 percent, whereas a project with a 10000 dollar overhead and projected cash flows of 3000 in the next five years has an IRR of 15.2 percent. Using the IRR method alone makes the second, smaller project…

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