Intermediate cash inflows
Will be compounded by using the cost of capital. The compounded sum so arrived at and the initial cost outflows can be used as the basis of determining the IRR. The limitation of IRR arising out of the inconsistency in the investment rate it can be obviated through the modified approach.
Thus, the assumption regarding the reinvestment rate of the cash inflows generated at the intermediate stage is theoretically more correct in the case of NPV as compared to the IRR. This is mainly because the rate is a consistent figure for the NPV but it can widely vary for the IRR, according to the cash flow patterns.