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What is an Investment Project's Implied Rate of Return?

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  • Graham Bornholt

Abstract

How to measure a project's implied rate of return has long been an unresolved problem, except for some special cases. This paper derives return on present cost (ROPC) as the correct measure of an investment project's implied rate of return. The IRR is a biased measure except for projects classified as simple projects, and this bias is likely to be substantial in many real†world applications. Thus while net present values should be used to determine whether to accept/reject projects, I recommend that analysts use ROPC in place of the IRR as a measure of a project's true rate of return.

Suggested Citation

  • Graham Bornholt, 2017. "What is an Investment Project's Implied Rate of Return?," Abacus, Accounting Foundation, University of Sydney, vol. 53(4), pages 513-526, December.
    • Handle: RePEc:bla:abacus:v:53:y:2017:i:4:p:513-526
    DOI: 10.1111/abac.12093
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    4. J. Hirshleifer, 1958. "On the Theory of Optimal Investment Decision," Journal of Political Economy, University of Chicago Press, vol. 66(4), pages 329-329.
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