This is a shortcoming of the IRR. Sometimes a firm will be evaluating several projects of different sizes, and if it chooses one project it cannot choose any of the others. If the company bases its decision on the projects' IRRs only, it may choose a very small project with a very high IRR over a larger project with a lower IRR but a higher NPV. The larger project would maximize shareholder wealth more than the smaller project would and should be selected even though its IRR is lower.
This is a shortcoming of the IRR. The IRR assumes that cash flow from the project can be reinvested at an interest rate that is equal to the project's IRR, and that may not be the case.
The IRR is a rate of return while the NPV is a money amount. For some managers, a rate of return may be easier to interpret than a money amount, so this is not a shortcoming of the IRR.
This is a shortcoming of the IRR. A conventional project begins with a cash outflow and that cash outflow is followed by several cash inflows. In other words, the direction of the cash flow changes just one time, from negative to positive. However, not all projects follow this conventional pattern. Some projects will begin with a negative cash flow, then have some years with positive cash flows but also have one or more years with negative cash flows. In these projects, the direction of the cash flow changes more than once. Whenever a project has a negative cash flow or flows in any subsequent year(s) after Year 0, it is called a nonconventional project. A project like this can have more than one IRR, because more than one discount rate will cause the project’s NPV to be zero. The number of IRRs will be equal to the number of sign changes in the cash flows.
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