A Resolution to the NPV – IRR Debate?

Posted: 21 Feb 2010 Last revised: 29 Aug 2016

See all articles by Michael Osborne

Michael Osborne

University of Sussex Business School

Date Written: January 21, 2010

Abstract

Two criteria for choosing between capital investment projects are net present value (NPV) and internal rate of return (IRR). Sometimes they provide inconsistent rankings. This inconsistency sparked a debate about which criterion is better. The debate has lasted more than 100 years.

This paper describes a new approach to the debate. The time value of money equation is a polynomial, and a polynomial of order n does not have a single root. It has n roots. The result of taking into account the n solutions for IRR is a new equation for NPV that suggests a resolution to the debate.

Keywords: Capital Budgeting, Complex Plane, Internal Rate of Return, Net Present Value

JEL Classification: C00, C60, C63, E22, E40, G00, G1, G24, G30, G31, O16, O22

Suggested Citation

Osborne, Michael J., A Resolution to the NPV – IRR Debate? (January 21, 2010). Quarterly Review of Economics and Finance, Vol.50, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=1556624

Michael J. Osborne (Contact Author)

University of Sussex Business School ( email )

Jubilee Building
University of Sussex, Falmer
Brighton, Sussex BNI 9SL
United Kingdom

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