Question

Academics warn practitioners about overusing of IRR, and, nevertheless, IRR remains probably the most popular measure. What is making the IRR so attractive? And what are the "dangers" of using IRR without NPV? You may use the textbook as your starting point, but please give your own examples, when using IRR as an investment criterion would lead, in your opinion, to a wrong decision.

Answer 1

IRR is simple to calculate and use.By comparing IRR with WACC one can easily accept or reject project.

The dangers of IRR are
1. In mutually exclusive projects IRR cannot help in selecting projects . Infact NPV helps better.
2. In case of multiple changes of sign of cash IRR can't be predicted properly as there are multiple IRR.
3. In some cases IRR and NPV can give conflicting results.

Example Projects has cash flows of
-100 ,100 -200,400

IRR will give multiple answers.

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well