A Resolution to the NPV – IRR Debate?
Posted: 21 Feb 2010 Last revised: 29 Aug 2016
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: Suggested Citation