Advantages Of Internal Rate Of Return (IRR)
Main benefits or advantages of internal rate of return (IRR) method of evaluating investment proposals can be expressed as follows:
1. Use Of Time Value Of Money
One of the main advantages of IRR is that, it considers time value or future earning capacity of money. Therefore it is a scientific method of capital budgeting.
2. Rate Of Return
Internal rate of return (IRR) method determines exact rate of return of the capital project.
3. Easy To Make Decision
It is easy to select appropriate investment alternative with the help of IRR technique. The project with higher IRR will be selected and others will be ignored.
4. Importance To Cashflow
IRR method treats equally to the cashflows of every years.
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5. Focus On Profitability
IRR selects most profitable project only. So, it is beneficial to the shareholders and the owners.
6. No Cost Of Capital
Cost of capital is not required while calculating IRR.
Disadvantages Of Internal Rate Of Return (IRR)
Main drawbacks or disadvantages of IRR can be expressed as follows:
1. Complexity
It is difficult to calculate and understand IRR method of capital budgeting. Trial and error method makes it more complicated.
2. Different Result
Results of NPV and IRR may not be matched because of size and life of the projects. Results also may differ due to the timings of cashflows also.
3. Unsuitable
IRR is not suitable for the comparison of mutually exclusive projects.
