Pros and cons of IRR
Pros of IRR
IRR can be useful for a business to determine the future growth and expansion it might experience as a result of a new project, compared to greater investment in its current operations.
As IRR is a uniform calculation for investments and projects of varying types, it can be used to rank different possible undertakings on an equal basis.
Cons of IRR
As previously mentioned, IRR tends to overestimate the potential returns of a project or future investment by making the NPV equal to zero. As a result, it is best used in conjunction with other capital budgeting measurements, such as MIRR.
IRR is also not an effective metric to use when comparing projects of different lengths, because shorter-duration projects often have a high IRR. Conversely, projects with a long duration often have a low IRR. This is not necessarily a true reflection of the potential returns of a project or investment.