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Investment appraisal techniques

The IRR does consider the time value of Makes no allowance for the size of the
money. initial investment.

As a percentage return, it is easily Interpolation only provides an estimate of
understood by non-financial managers. the true IRR.

Considers cash flows. Fairly complicated to calculate.

Considers the whole life of the project. Basing decisions on the IRR of projects
may conflict with looking at NPVs. If this
occurs, the NPV must take precedence.

The IRR can be calculated without It is not a measure of absolute
reference to the cost of capital. profitability, and does not necessarily
reflect the impact on shareholders
wealth.

A company selecting projects where the Ignores the length of the investment
IRR exceeds the cost of capital will period.
normally increase shareholders’ wealth.

NPV vs IRR:

The advantage of NPV is that it tells us the absolute increase in
shareholder wealth as a result of accepting the project, at the current
cost of capital. The IRR simply tells us how far the cost of capital could
increase before the project would not be worth accepting.

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