Despite it being widely taught in business schools and practiced in the industry, you should think twice before using the internal rate of return as a criteria for making an investment decision.
Hosts and finance professors Jonathan Berk and Jules van Binsbergen are back to discuss why using the internal rate of return (IRR) as an investment decision rule is fundamentally flawed compared with the net present value (NPV).
They outline IRR’s problems including multiple or nonexistent solutions, failure to account for scale and timing, and structural vulnerability once financing/payment plans are allowed, enabling arbitrary or inflated IRRs.
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