- Formula, annuity tables and computer programmes are available to calculate internal rate of return. Computer can do seconds where people take hours to calculate IRR.
- The formula for calculating Internal Rate of Return is:
where R= Cash Flow, r = discount rate, n = number of years
- It considers time value of money.
- It considers cash flow over the total life of the project.
- Comparison of IRR with cost of capital considers the risk factor.
- It is complex and difficult to use.
- The discount rate is not fixed.
- It needs to be used carefully for evaluating exclusive projects.