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Hello M John,
On of the assumptions of IRR is that it assumes that cash return from the project may reinvested at the project’s IRR which is not realistic.
and there is another assumption which says : It can give conflicting signals with mutually exclusive project.
Can you please clarify these points further.
Thanks,
When choosing between projects we always (in the exam) choose the one with the higher NPV. However it can be the case that the one with the highest NPV has a lower IRR.
Consider this extreme example:
Suppose project A lasts for only one year and gives a return of 10% per year.
Project B lasts for 20 years and gives a return of 9% per year.
The cost of capital is 5%.If you were investing your money then you would prefer B, unless it was the case that the returns from A could be reinvested to as to always earn 10% for ever.
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