Question

List and briefly discuss the advantages and disadvantages of the internal rate of return (irr).

Answer 1

It is essential to understand the advantages and disadvantages of internal rate of return method before applying this technique.

The first advantage of this method is that it considers the time value of money and considers cash flows. The other advantage is it is simple to interpret and calculate. The third advantage of this method is that the required rate of return need not be estimated.

The biggest disadvantage of this method is that it ignores the economies of scale and the dollar value of investment as well as benefits. The method also assume that cash flows are invested at internal rate of return which is a simplified assumption. In case of unconventional cash flows this method does not yield the correct result.