Volume 52 Issue 8
Internal rate of return (IRR) -- a flawed and dysfunctional project-evaluation criterion
, 2000, Vol. 52, No. 8, pp. 32-39
The choice of a theoretically sound project-evaluation criterion that would maximize an owner’s wealth is fundamental for a successful and meaningful evaluation. Under the assumption of the perfect capital market, the net present value (NPV) has become universally accepted by both financial and engineering economists (Hirschleifer, 1958; Bussey, 1978; Levy and Sarnat, 1990; Brealey et al., 1992) as the theoretically correct evaluation criterion for financial and industrial projects, including those in the mineral industry. Subsequently, the validity and usefulness of any other project-evaluation criterion have been established by testing whether or not this criterion is NPV-consistent (compatible). If it is, a bill of health is given to that criterion.
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