Why IRR is not the right measure for return analysis and What’s then?

Rachmad Irwanto


Literature reviews by the author on capital budgeting techniques weighting on the use of NPV and IRR shows that using IRR without certain cautions has an inconsistency. It has something to do with the rules of thumb about using NPV and IRR. Recall that IRR is useful when it has an external comparison such as a hurdle rate. Even then, both rates are mutually exclusive. Cashflow sequence turned out also affecting how IRR calculation would get us. Extended attempts using illustrative situations with sensitivity analysis exhibit influence of each parameter to the IRR result. This paper is intended to re-summarize already existing papers that using NPV and IRR should be followed by understanding their weaknesses. Its correlation in civil engineering works is for feasibility analyst team to know limitations at situations that needs consideration before taking conclusions from applying the techniques.

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