Advantages of NPV vs. IRR
Advantage of NPV is that it is a direct measure of expected increase in value of firm. Theoretically is best method, however, does not take into account the size of the project.
Key advantage of IRR is that it measures profitabilty as a percentage and shows return on each dollar invested. IRR provids information on margin of safety, meaning how much over the IRR is then the requried rate of return.
Disadvantages of IRR are 1. possibility of produc ing rankings of mutually exclusive projects from those from NPV analysis.This can be bc of cash flow differences. Additionally if IRR for two investments of different sizes and one investment is higher for the smaller investment, but the NPV added is greater for the larger investment, you would take the larger investment regardless of the smaller IRR.
IRR also assumes that you reinvest earnings at the firms IRR. However, NPV assumes they can be reinvested at the discount rate used to caluclate NPV, bc you can use cash to pay off debt and lower the cost of capital.
An additonal issue with IRR, is that an unconventional cash flow can produce multiple IRR's.