# Can IRR Be Used to Compare Projects with Different Investment Timelines?

## Understanding IRR and Its Role in Project Comparison

The IRR, essentially, represents the discount rate at which the net present value (NPV) of a project's cash flows equals zero. In simpler terms, it's the rate of return at which an investment breaks even. When considering projects with different investment timelines, the IRR can provide a seemingly straightforward method for comparison. For instance, a project with a higher IRR might appear more attractive at first glance.## The Limitations of IRR in Comparing Projects with Different Timelines

However, using IRR to compare projects with different timelines has its limitations. The primary concern stems from the implicit assumption within IRR calculations: that all cash flows generated by a project are reinvested at the same rate as the IRR itself. This assumption might not hold true in real-world scenarios, where reinvestment opportunities may vary significantly over time.## Addressing the Time Discrepancy: Alternative Approaches

To overcome this limitation, it's crucial to incorporate other financial metrics alongside IRR when comparing projects with different timelines. The net present value (NPV) method, for instance, offers a more accurate comparison by discounting all future cash flows back to their present value using a predetermined discount rate, typically the company's cost of capital. This approach provides a more realistic view of a project's profitability in present-day terms.### Related Question

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