Why Do Managers Prefer Irr

22 Pages Posted: 8 Feb 2004

Date Written: January 15, 2004

Abstract

Finance textbooks recommend the use of Net Present Value (NPV) as the evaluation tool for Capital Budgeting. Yet surveys of managers have consistently shown that managers prefer Internal rate of Return (IRR) to NPV. This article rigorously establishes the validity of the interpretation of IRR as the return earned on funds that remains internally invested in the project. Using this interpretation IRR can be viewed as a tool to evaluate the riskiness of the capital budgeting proposal.

Keywords: Capital Budgeting, Internal Rate of Return, IRR, Net Present Value, NPV

JEL Classification: G31

Suggested Citation

Bhattacharyya, Nalinaksha, Why Do Managers Prefer Irr (January 15, 2004). Available at SSRN: https://ssrn.com/abstract=496482 or http://dx.doi.org/10.2139/ssrn.496482

Nalinaksha Bhattacharyya (Contact Author)

University of Alaska Anchorage ( email )

3211 Providence Drive
Anchorage, AK 99508
United States
(907)786 1949 (Phone)
(907) 786 4115 (Fax)

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