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2 posts Re:Topic 4 DQ 2 - Another Supplemental Question (CAT) Folks - Are there any...


2 posts
Re:Topic 4 DQ 2 - Another Supplemental Question (CAT)

Folks - Are there any factors associated with IRR that would make it less "trustworthy" under certain conditions than NPV when the results conflict?

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Answer #1

In case of mutually exclusive projects, there can be a possibility of NPV and IRR conflict caused due to either the size of the project or cash flow distribution. In this case this is advisable to consider NPV as it is an absolute measure providing the dollar value of the return. On the other hand, IRR is considered to be a relative measure, which is used to rank different projects by providing their rate of return.

Other disadvantages of IRR:

It is unable to distinguish between investing and borrowing activities.

A project can have multiple IRR if there is a cash outflow even after the investment has been made at time 0.

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