When IRR Fails: The Case of a Nonexistent IRR

[@majinnhec]

Another excellent instructional video - thank you!

[@Edspira]

Glad it was helpful!

[@anglonrx2754]

What is the point of IRR when NPV exists? it feels like I was just taught about it to be told how terrible it is

[@bhumanyusingh6347]

michael how would we calculate the irr for a project where we first take a loan and then invest it into our project. I assume that the interest rate that we are going to be paying on the loan is going to complicate things. By the way just started watching your videos, these are really helpful

[@exsna]

In what scenarios could this case happen? How can we know if there will be no IRR apart from putting the data in the excel formula?

[@Edspira]

You have to look at the cash flows. If you have a positive cash flow followed by negative cash flows, then you probably won't be able to solve the equation. Also, if the cash flows alternate back and forth between positive and negative then there will be no IRR. The easiest way I know how to check this is by using Excel, but I'm sure there's other methods out there.

[@sdiptanil]

Edsipra, in all these calculations may I assume that r ( cost of capital ) equals to 10 % all the time ?

[@Edspira]

Diptanil, the cost of capital is the opportunity cost of making the investment. It is the rate of return that could have been earned by putting the same money into a different investent of similar risk. It will not be 10% all the time. I just used 10% because it makes the calculations easier. You would have to determine the cost of capital for each project. Good question!

[@sdiptanil]

Thanks a lot Edspira for clarifying.

[@KannapiranArjunan-vm2rq]

The DCF method is not suitable and I have introduced a Capital Amortization Schedule Method (CAS =DCF) and a modified CAS method (MCAS) to resolve these problems. Accordingly, in this case (5 -4 -4 -4 -4 17): 1. The IRR = 25% by MCAS method (ROI (before discount) is 22/16 = 37.5% when discounted the IRR is 25%) 2. The NPV = 2.339 by MCAS method and 3. your estimated NPV =2.876 includes reinvestment (0.65) and therefore spurious. Please visit for my papers: Arjunan, Kannapiran, Validity of NPV Rule and IRR Criterion for Capital Budgeting and CBA (December 17, 2019). Available at SSRN: ssrn.com/abstract=3505058 or dx.doi.org/10.2139/ssrn.3505058