Technical note--the internal rate of return (IRR) as a financial indicator.: An article from: Engineering Economist
Book Details
Author(s)Miroslaw M. Hajdasinski
PublisherThomson Gale
ISBN / ASINB000BY2RBK
ISBN-13978B000BY2RB6
MarketplaceFrance 🇫🇷
Description
This digital document is an article from Engineering Economist, published by Thomson Gale on June 22, 2004. The length of the article is 4774 words. The page length shown above is based on a typical 300-word page. The article is delivered in HTML format and is available in your Amazon.com Digital Locker immediately after purchase. You can view it with any web browser.
From the author: In their recent paper Tang and Tang (2003, pp. 69-78) revive a longstanding controversy--net present value (NPV) versus internal rate of return (IRR)--by characterizing the NPV as an economic indicator and the IRR as a financial one. The paper implies that this distinction justifies ranking financial alternatives by ranking their IRRs. In the current article, it is argued that the direct IRR ranking does not necessarily provide the same evaluation environment--and therefore a fair comparison--for each alternative involved, and that the incremental ranking approach is needed to remedy this shortcoming. The article also points out that Tang and Tang's numerical examples of simple projects with one sign change in their cash flow patterns do not address the problem of multiple IRRs, which consequently renders Tang and Tang's ranking approach dysfunctional. It is demonstrated that the concept of a true rate of return, substituting for the non-performing IRR and applied in conjunction with the incremental approach, provides an adequate tool for ranking mutually exclusive projects or a project's technical or financial alternatives.
Citation Details
Title: Technical note--the internal rate of return (IRR) as a financial indicator.
Author: Miroslaw M. Hajdasinski
Publication:Engineering Economist (Magazine/Journal)
Date: June 22, 2004
Publisher: Thomson Gale
Volume: 49 Issue: 2 Page: 185(13)
Distributed by Thomson Gale
From the author: In their recent paper Tang and Tang (2003, pp. 69-78) revive a longstanding controversy--net present value (NPV) versus internal rate of return (IRR)--by characterizing the NPV as an economic indicator and the IRR as a financial one. The paper implies that this distinction justifies ranking financial alternatives by ranking their IRRs. In the current article, it is argued that the direct IRR ranking does not necessarily provide the same evaluation environment--and therefore a fair comparison--for each alternative involved, and that the incremental ranking approach is needed to remedy this shortcoming. The article also points out that Tang and Tang's numerical examples of simple projects with one sign change in their cash flow patterns do not address the problem of multiple IRRs, which consequently renders Tang and Tang's ranking approach dysfunctional. It is demonstrated that the concept of a true rate of return, substituting for the non-performing IRR and applied in conjunction with the incremental approach, provides an adequate tool for ranking mutually exclusive projects or a project's technical or financial alternatives.
Citation Details
Title: Technical note--the internal rate of return (IRR) as a financial indicator.
Author: Miroslaw M. Hajdasinski
Publication:Engineering Economist (Magazine/Journal)
Date: June 22, 2004
Publisher: Thomson Gale
Volume: 49 Issue: 2 Page: 185(13)
Distributed by Thomson Gale
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