Limitation
of IRR
1. Confusing Concept
IRR
concept is a confusing concept, and requires a lot of technical knowledge for
understanding. IRR is a rate at which NPV is zero does not provide any logical
ground for decision making.
2. Complex Calculation
IRR
calculation is a complex calculation; you need to consult the formula. IRR
formula is not easy to remember; therefore you always need to consult some
technical paper or book for this formula.
3. Absolute Result
IRR
formula does not produce any absolute result for the investment decision. The
result of irr cannot be interpreted in absolute term. On other hand NPV shows
the result in absolute term. On other hand NPV provides a absolute value.
4. IRR lack comparison
IRR
cannot be used as comparing tool for project with different duration.
5. Multiple IRR
There
may be a situation, where there may be multiple result i.e. there are positive
cash flow, then negative cash flow, then again positive cash flow.
6. Unrealistic Assumption
IRR
limitation include the using of unrealistic assumption i.e. funds will be
reinvested on IRR. In practical life this is not the case, and reinvestment of
earned fund cannot be invested at same rate.
