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A simple intuitive NPV-IRR consistent ranking

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  • Ben-Horin, Moshe
  • Kroll, Yoram

Abstract

Numerous recent studies have revisited the issue of the potential conflicting NPV-IRR ranking of competing investment projects. Most have suggested procedures that resolve the conflict after performing an iso-NPV modification of at least one of the cash flows. However, none has provided a general sufficient condition that guarantees the absence of NPV-IRR ranking conflict. We define dominance between cash flow streams and show that if the streams are conventional, dominance of one stream over another ascertains no NPV-IRR ranking conflict. While dominance among original cash flows may be relatively rare, iso-NPV cross-risk adjustment and iso-NPV modification of one cash flow stream may easily reveal such dominance even if the original projects are subject to different risks. The resulting implication is a practical, simple and economically intuitive procedure that guarantees consistent NPV-IRR ranking, while minimizing the implicit or explicit distortions of the original competing cash flow streams and their IRRs.

Suggested Citation

  • Ben-Horin, Moshe & Kroll, Yoram, 2017. "A simple intuitive NPV-IRR consistent ranking," The Quarterly Review of Economics and Finance, Elsevier, vol. 66(C), pages 108-114.
    • Handle: RePEc:eee:quaeco:v:66:y:2017:i:c:p:108-114
    DOI: 10.1016/j.qref.2017.01.004
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    References listed on IDEAS

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    1. Moshe Ben-Horin & Yoram Kroll, 2012. "The Limited Relevance of the Multiple s," The Engineering Economist, Taylor & Francis Journals, vol. 57(2), pages 101-118.
    2. Carlo Alberto Magni, 2010. "Average Internal Rate of Return and investment decisions: A new perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    3. Osborne, Michael J., 2010. "A resolution to the NPV-IRR debate?," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 234-239, May.
    4. Kierulff, Herbert, 2008. "MIRR: A better measure," Business Horizons, Elsevier, vol. 51(4), pages 321-329.
    5. Carlo Alberto Magni, 2010. "Average internal rate of return and investment decisions: A new perspective," PROYECCIONES FINANCIERAS Y VALORACION 006653, MASTER CONSULTORES.
    6. Carlo Alberto Magni, 2010. "Purely Internal Rate of Return and Investment Decisions: A Cash-Flow Perspective," Proyecciones Financieras y Valoración 7285, Master Consultores.
    7. Carlo Magni, 2013. "The Internal Rate of Return Approach and the AIRR Paradigm: A Refutation and a Corroboration," The Engineering Economist, Taylor & Francis Journals, vol. 58(2), pages 73-111.
    8. John Graham & Campbell Harvey, 2002. "HOW DO CFOs MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 15(1), pages 8-23, March.
    9. Petry, Glenn H. & Sprow, James, 1993. "The theory and practice of finance in the 1990s," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(4), pages 359-381.
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    1. Marchioni, Andrea & Magni, Carlo Alberto, 2018. "Investment decisions and sensitivity analysis: NPV-consistency of rates of return," European Journal of Operational Research, Elsevier, vol. 268(1), pages 361-372.
    2. Magni, Carlo Alberto & Marchioni, Andrea, 2018. "Project appraisal and the Intrinsic Rate of Return," MPRA Paper 95262, University Library of Munich, Germany.

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