Advantages of IRR:

1. Considers Cash Flows: It is based on actual cash flows, not accounting profits, providing a more realistic picture of a project’s profitability.
2. Time Value of Money: IRR takes into account the time value of money, unlike simpler methods like the Payback Period.
3. Easy to Interpret: The IRR is expressed as a percentage, which is easy for managers and stakeholders to understand and compare with the required rate of return or cost of capital.
4. Decision Alignment with NPV: For single projects, the IRR method generally provides the same accept/reject decision as the Net Present Value (NPV) method.
5. Relative Measure of Profitability: It provides a relative measure of an investment’s efficiency, making it useful for comparing projects of different sizes or durations.

Disadvantages of IRR:

1. Multiple IRRs: Projects with non-conventional cash flows (e.g., cash flows changing signs more than once) can produce multiple or no IRRs, making interpretation difficult.
2. Ignores Scale of Project: IRR does not consider the size of the project and can be misleading when comparing projects of different sizes.
3. Reinvestment Assumption: It assumes that all cash inflows are reinvested at the same rate as the IRR, which may not be realistic.
4. Mutual Exclusivity Issues: For mutually exclusive projects, IRR may lead to wrong decisions as it does not account for differences in project scale or timing of cash flows.
5. No Indication of Value Addition: Unlike NPV, IRR does not show the absolute amount by which an investment will increase the value of the firm, which can be critical for decision-making.