Financial ratios

Internal Rate of Return (IRR) is a powerful metric for evaluating investment profitability, but not all cash flow patterns allow for its calculation. When cash flows alternate between positive and negative multiple times, IRR may yield multiple solutions, making it unreliable. Similarly, if all cash flows are positive or all are negative, no IRR exists because no discount rate equates the net present value to zero. Another challenge arises when cash flows create a situation where no real solution exists, leading to an undefined IRR. Understanding these limitations helps investors avoid misinterpretation and choose more suitable financial metrics.

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