This method is very simple to calculate and familiar to most managers. But it fails to consider the time value of money as it uses only accrual data, not cash flows.
IRR is the percentage return expected to be earned from a project, taking in to account the time value of money. It is the discount rate that makes the NPV= 0. A firm should accept the project if IRR > cost of capital, as it add value to the firm. In the case of IRR = 0, the project should be accepted because it satisfies investors’ required rate of return although no extra value will be added to the firm. On other hand IRR gives multiple solutions and that is why it is not suitable for