Various Methods Aim to Solve the Limitation of IRR

Abstract

Both NPV and IRR are metrics that are used to calculate the profit and help investors to make decisions about their investments. While these methods help investors to identify the most profitable project, we cannot ignore some limitations of using them as well. Through analysing the strengths and limitations of these two methods, the modified internal rate of return and financial management rate of return is considered as the complement of IRR. This paper suggests that it is unrealistic to have a perfect metric without any limitation, but several methods can be combined and applied into practice. Keywords: internal rate of return, net present value, modified internal rate of return