Download Direct Costs

Project A
Year
Cashflow (x)
Discount Factor (=)
Present
£
20%
£
-240,000
-240,000
60,000
..833
+ 49,980
100,000
..694
+ 69,400
100,000
..579
+ 57,900
80,000
.482
+ 38,560
60,000
..402
+ 24,120
Net Present Value
+ 40
0
1
2
3
4
5

Project B IRR = 15%

Project C IRR = 24%
Where there are competing projects, the one with the highest IRR should be
preferred
Project A
Project B
Project C
PP
ARR
NPV
IRR
Disadvantages of IRR
The main disadvantage of IRR is that it does not address the objective of wealth
maximisation. IRR will always see a return of 30% being preferable to 25%
(assuming that the opportunity cost of finance is lower than this). However the
‘scale of investment’ has been ignored. For example £1m invested at 20% would
make you richer than £0.5m invested at 25%. IRR does not recognise this.
It is preferable to use NPV which is always more reliable and encompassing than
IRR.
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