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Cao
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Weaknesses of Internal Rate of Return (IRR)
The primary weaknesses of this method are:
- IIR sometimes requires unrealistic assumptions about reinvestment of funds, and
- Manual calculation is difficult. (...) Read more? Sign up for free
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Alpin McGregor, freeelance, United Kingdom
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Weaknesses of IRR Method
The easiest way of looking at weakness of IRR model is by comparing 2 situations:
1. You have $1 and earn 100% rate of return in one year. You will have $2 at the end of the year.
2. You have $100 and earn 10% rate of return in one year. You will have $110 at the end of the year.
If you base your decision on Internal Rate of Return you will always prefer situation 1.
If you base your decision on NPV you will always prefer situation 2.
The problem in real life situations is that if you could find 100 projects of $1 that will give you 100% return then clearly that is better than one project of £100 at 10% rate of return.
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Rachid LANGAR, Business Consultant, Qatar
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Evaluation Methods are All Based on Assumptions
Project evaluation are mostly based on assumptions (...)
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Tyrone Skogstrom, Management Consultant, Sweden
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Do not Use IRR When Investing in Business Improvements
I do not recommend IRR as a decision factor for ex (...)
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More on Internal Rate of Return
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Special Interest Group Leader
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