Computational Problems

Apart from inconsistency in the application or me reinvestment rate, the IRR method also suffers from computational problems. These may be discussed with reference to two aspects.

Computation in Conventional Cash Flows

It has been shown while computing the IRR that the calculation of the IRR involves a trial and error procedure as a result of which complicated computation has to be done. In conventional proposals having a constant cash inflow stream (i.e. annuity) the computation is not be tedious. But when the cash inflows are unequal over laborious calculations are involved. The calculations of the NPV on the other hand is, relatively simple and presents no special problems.

Computation in Non-conventional Flows

The problem of computation of IRR gets accentuated when cash flow patterns are non-conventional. The complications in such cases are (a) that the IRR is indeterminate, and (b) there may be multiple IRRs.

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