Problems with the IRR

The problems with the IRR come about when the cash flows are not conventional or when we are trying to compare two or more investments to see which is best. In the first case, surprisingly, the simple question: What's the return? can become very difficult to answer. In the second case, the IRR can be a misleading guide.

Nonconventional Cash Flows Suppose we have a strip-mining project that requires a $60 investment. Our cash flow in the first year will be $155. In the second year, the mine will be depleted, but we will have to spend $100 to restore the terrain. As Figure 9.6 illustrates, both the first and third cash flows are negative.

0 0

Post a comment