Do not Use IRR When Investing in Business Improvements
Tyrone Skogstrom, Management Consultant, Sweden
I do not recommend IRR as a decision factor for example IT investments or any investment with business improvement as objective. IRR works well only if you have one single initial year of investment (yr 0), followed by only positive yearly cash flows.
Moreover IRR also assumes each positive yearly cash flow can be reinvested with the same discount as you total IRR will be. These two issues can rarely be accomplished. Many IT investments have non-symmetric cashflows, such as for example when you're outsourcing.
because of above issues IRR will then return a wrong result.
Therefore, many organizations do not use IRR for investments in business change projects. However, IRR sometimes is demanded, your organization might define a minimum allowed IRR. A hurdle rate. And you need the data to pass through that hurdle rate.