Internal Rate of Return (IRR) is widely used and widely misunderstood.
IRR assumes reinvestment at the same rate, ignores risk dispersion, and can be distorted by timing. Two investments with identical IRRs can have entirely different risk profiles.
IRR does not capture capital at risk, liquidity constraints, or exit uncertainty. It should be interpreted alongside duration, cash-flow certainty, and downside exposure.
Overreliance on IRR often masks structural weaknesses. Good decisions require a broader analytical lens.
Metrics inform decisions; they do not make them.
