Hope this finds you well.
I have a query regarding IRR and its substance.
We can use IRR to estimate the profitability of the potential investment. I.e we have $100 and a project with the following cash flows.
year 0 - (100), year 1 - 20, year 2 - 30, year 3 - 30, year 4 - 40.
IRR of the project 6,96% and we can say that the profitability of the project is 6,96%. When I’m saying it, I expect that if I invest in year 0 $100 at rate 6,96% compounded annually I would earn the same amount as the potential investment project. But it doesn’t work out this way.
Could you please explain what’s flawed with the logic above and why?