- CFA Exams
- CFA Level I Exam
- Study Session 10. Corporate Finance (1)
- Reading 32. Capital Budgeting
- Subject 5. Comparison of the NPV and IRR Methods

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**CFA Practice Question**

Which of the following is NOT a disadvantage of the IRR method?

A. It measures the expected rate of return from a project.

B. It is more difficult to compute than NPV.

C. It is affected by the scale and timing of project cash flows.

**Explanation:**The IRR measures the expected rate of return when expected cash flows are used for its calculation. This is not a disadvantage of the IRR method.

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**User Contributed Comments**
8

User |
Comment |
---|---|

Gigem |
I'm confused. How is the IRR being "affected by the scale and timing of project cash flows" a disadvantage of the IRR method? |

lockedin |
question says NOT a disadvantage. |

steved333 |
C is a disadvantage because the computation of IRR is estimated, though the actual timing and scale of cash flows can prove that estimate to be wrong. |

kellyyang |
I also got confused by answer C!! |

bmesfin |
Consider a project with multiple IRRs due to unconventional cash flows. That would render C a disadvantage. |

kritan |
it is highly arguable that IRR is more difficult to compute than NPV. On your fingers maybe, but on any calculator or Excel sheet it's child's play. |

ascruggs92 |
IRR can't be calculated manually, you need a calculator to do it, whereas NPV can be manually calculated. From that standpoint, IRR is harder to calculate. |

heshamessa |
answer c is confusing , becasue project scale is one of the advantage of IRR, NOT disadvantage |