Internal Rate of Return: A Cautionary Tale - Tempted by a Project With a High Internal Rate of Return? Better Check Those Interim Cash Flows Again
- Topics:
- Investment Strategy,
- Valuation
- Tags:
- Finance,
- Investment,
- Rate
- Source:
- McKinsey & Company
Vendor Registration: required
Overview: Many executives use the internal rate of return as the measure of a proposed project's long-term value. This approach does have intuitive appeal, but the complicated model used to calculate the internal rate of return makes certain assumptions that exaggerate a project's true value. Companies and their advisers use the internal rate of return at their peril. A modified version that sets more realistic interim return rates would be vastly preferable, but the best alternative measure is net present value.
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Format: HTML | Date: Aug 2004 | Pages: 4
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