Capital Budgeting: NPV v. IRR Controversy, Unmasking Common Assertions
11 Pages Posted: 23 Apr 2007 Last revised: 6 Mar 2018
Date Written: April 19, 2007
The conflict between NPV and IRR arises because of misinterpretations that have been made. There is no real conflict. The solution of a polynomial is the subject matter: no more, no less. The NPV-method and the IRR-method are not two measures of investment worth - as it is reported in many textbooks - but just one single method. Moreover, the NPV/IRR-method is plain mathematics and does not pretend to be a ranking device; it cannot be used as such either. Mathematics is yes indeed a tool, but economics can only then be the master if the tool is used properly and the results are interpreted correctly. To help assess the very basics of reckoning investment opportunities as well as to improve the current pedagogy - the latter is so dearly necessary - are the two reasons for writing and publishing this paper.
Keywords: Capital Budgeting, Measures of Investment Worth, NPV, IRR, Investment Opportunities, Ranking Investment Proposals, Reinvestment Assumption
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