In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each approach has its own distinct advantages and disadvantages.
All other things being equal, using internal rate of return (IRR) and net present value (NPV) measurements to evaluate projects often results in the same findings. However, there are a number of projects for which using IRR is not as effective as using NPV to discount cash flows. IRR's major limitation is also its greatest strength: it uses one single discount rate to evaluate every investment.
Although using one discount rate simplifies matters, there are a number of situations that cause problems for IRR. If an analyst is evaluating two projects, both of which share a common discount rate, predictable cash flows, equal risk, and a shorter time horizon, IRR will probably work. The catch is that discount rates usually change substantially over time. For example, think about using the rate of return on a Tbill in the last 20 years as a discount rate. Oneyear Tbills returned between 1% and 12% in the last 20 years, so clearly the discount rate is changing.
Without modification, IRR does not account for changing discount rates, so it's just not adequate for longerterm projects with discount rates that are expected to vary.
Another type of project for which a basic IRR calculation is ineffective is a project with a mixture of multiple positive and negative cash flows. For example, consider a project for which the marketing department must reinvent the brand every couple of years to stay current in a trendy market.
The project has cash flows of:
 Year 1 = $50,000 (initial capital outlay)
 Year 2 = $115,000 return
 Year 3 = $66,000 in new marketing costs to revise the look of the project.
A single IRR can't be used. Recall that IRR is the discount rate or the interest needed for the project to break even given the initial investment. If market conditions change over the years, this project can have multiple IRRs. In other words, long projects with fluctuating cash flows and additional investments of capital may have multiple distinct IRR values.
The advantage to using the NPV method over IRR is the above example is that NPV can handle multiple discount rates without any problems. Each year's cash flow can be discounted separately from the others making NPV the better method.
Another situation that causes problems for users of the IRR method is when the discount rate of a project is not known. In order for the IRR to be considered a valid way to evaluate a project, it must be compared to a discount rate. If the IRR is above the discount rate, the project is feasible; if it is below, the project is considered not doable. If a discount rate is not known, or cannot be applied to a specific project for whatever reason, the IRR is of limited value. In cases like this, the NPV method is superior. If a project's NPV is above zero, then it's considered to be financially worthwhile.
So, why is the IRR method still commonly used in capital budgeting? Its popularity is probably a direct result of its reporting simplicity. The NPV method is inherently complex and requires assumptions at each stage such as the discount rate or the likelihood of receiving the cash payment.
The IRR method simplifies projects to a single number that management can use to determine whether or not a project is economically viable. The result is simple, but for any project that is longterm, that has multiple cash flows at different discount rates, or that has uncertain cash flows – in fact, for almost any project at all – IRR isn't an effective measurement.

How do you calculate IRR in Excel?
Understand how to calculate the internal rate of return (IRR) in Excel and how it's used to determine anticipated yield per ... Read Answer >> 
What's the difference between weighted average cost of capital (WACC) and internal ...
Both weighted average cost of capital (WACC) and internal rate of return (IRR) are great measures for assessing value, but ... Read Answer >> 
How do I use Excel to get discount rate over time?
Learn how to calculate discount rate in Microsoft Excel and how to find the discount factor over a specified number of years. Read Answer >> 
How do you use discounted cash flow to calculate a capital budget?
Learn how discounted cash flows are used in creating capital budgets as a part of the net present value and internal rate ... Read Answer >> 
Present Value vs Internal Rate of Return
NPV and IRR are popular ways to measure the return of an investment project. Learn how net present value and internal rate ... Read Answer >> 
What are the main differences between compound annual growth rate (CAGR) and internal ...
The compound annual growth rate (CAGR), measures the return on an investment over a certain period of time. The internal ... Read Answer >>

Investing
Internal rate of return: An inside look
The internal rate of return can be used to measure an compare capital projects, stock buyback programs, and investments to determine which will yield the most favorable return. 
Small Business
Calculating IRR with Excel
Find out how to calculate the internal rate of return on investments using Microsoft Excel, as illustrated in different investment scenarios. 
Investing
Internal Rate of Return Formula for Excel
The internal rate of return, or IRR, is a popular metric businesses use to measure a project’s return on investment. 
Investing
Return on investment versus internal rate of return
Read about the similarities and differences between an investment's internal rate of return (IRR) and its return on investment (ROI). 
Financial Advisor
A Guide on the RiskAdjusted Discount Rate
When a project or investment faces higher amounts of risk or uncertainty, it may be appropriate to utilize the riskadjusted discount rate. 
Investing
Top 3 Pitfalls Of Discounted Cash Flow Analysis
Find out why the Discounted Cash Flow (DCF) method can be difficult to apply to reallife valuations. 
Insurance
Get Sale Prices On Healthcare With Discount Plans
Medical discount plans can help the uninsured or underinsured afford better healthcare. 
Personal Finance
10 Ways to Improve Cash Flow in Construction
Here's how improving cash flow in construction requires some sectorspecific strategies.

Profitability Index Rule
The profitability index rule is a regulation for evaluating whether ... 
Pooled Internal Rate Of Return  PIRR
Pooled internal rate of return is a method of calculating overall ... 
Unconventional Cash Flow
An unconventional cash flow is a series of inward and outward ... 
Discounting
Discounting is the process of determining the present value of ... 
Discount Rate
Discount rate is the interest rate charged to commercial banks ... 
1%/10 net 30
1%/10 net 30 is a way of providing cash discounts on purchases, ...