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On the (non-)equivalence of IRR and NPV

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  • Weber, Thomas A.

Abstract

The internal rate of return (IRR) is generally considered inferior to the net present value (NPV) as a tool for evaluating and ranking projects, despite its inherently useful comparability to the cost of capital and the return of other investment opportunities. We introduce the “selective IRR”, a return criterion which, as a selection of an extended set of possible IRRs, is NPV-consistent. The selective IRR always exists, is unique, easy to compute, and does not suffer from drawbacks that befall the project investment rate, the only other known NPV-consistent return criterion.

Suggested Citation

  • Weber, Thomas A., 2014. "On the (non-)equivalence of IRR and NPV," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 25-39.
    • Handle: RePEc:eee:mateco:v:52:y:2014:i:c:p:25-39
    DOI: 10.1016/j.jmateco.2014.03.006
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    Cited by:

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    3. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    4. Kannapiran C. Arjunan, 2019. "Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems," Economic Papers, The Economic Society of Australia, vol. 38(1), pages 56-69, March.
    5. Welkenhuysen, Kris & Rupert, Jort & Compernolle, Tine & Ramirez, Andrea & Swennen, Rudy & Piessens, Kris, 2017. "Considering economic and geological uncertainty in the simulation of realistic investment decisions for CO2-EOR projects in the North Sea," Applied Energy, Elsevier, vol. 185(P1), pages 745-761.
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    7. Thomas A. Weber, 2017. "Optimal switching between cash-flow streams," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 86(3), pages 567-600, December.
    8. Jan Hron & Tomas Macak, 2014. "Economic evaluation and design of control mechanisms to determine the concentration of juices," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 60(12), pages 539-545.
    9. Andor, Gyorgy & Mohanty, Sunil K. & Toth, Tamas, 2015. "Capital budgeting practices: A survey of Central and Eastern European firms," Emerging Markets Review, Elsevier, vol. 23(C), pages 148-172.
    10. Źróbek-Różańska Alina, 2016. "Compensation in Residential Real Estate Purchasers’ Decisions," Real Estate Management and Valuation, Sciendo, vol. 24(4), pages 70-78, December.
    11. José María Codosero Rodas & José Cabezas Fernández & José Manuel Naranjo Gómez & Rui Alexandre Castanho, 2019. "Risk Premium Assessment for the Sustainable Valuation of Urban Development Land: Evidence from Spain," Sustainability, MDPI, vol. 11(15), pages 1-21, August.
    12. Alexandr V. Zhevnyak, . "Reference," NEW CONCEPT OF RETURN ON BORROWED AND INVESTMENT PROJECTS,, Socionet.

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