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NET PRESENT VALUE VERSUS INTERNAL RATE OF RETURN

Vol. 4, No 1, 2011

Lajos Juhász

Institute of Corporate Economics

Faculty of Economics

NET PRESENT VALUE VERSUS INTERNAL RATE OF RETURN

University of West Hungary

lajosjuhasz@ktk.nyme.hu

 

ABSTRACT. The economic professional literature which deals with investment decisions can be characterised in general that the net present value shows objective picture for the decision maker while the internal rate of return – not even mentioning other „competitors” – have numerous mistakes therefore its expressiveness is limited.

The net present value – determined by the minimally expected yield (calculated interest rate) – shows that how amount of wealth growth have been accumulated by the investment during its duration, but it does not inform about the real profitability of capital investment. However the investment’s internal rate of return informs the decision maker that how works the real yield of long capital investment. As every investment economic method, the adaptation of internal rate of return could also have barriers. The barriers usually derive that the method is adapted in such ’model conditions’ where it is impossible to provide reliable information.

This paper analyses that which method gives more relevant information for the manager either of two most often used investment methods.

 

Received: March, 2011

1st Revision: April, 2011

Accepted: July, 2011

JEL Classification: M21, G11, G17, D24, D81

Keywords: business economics, portfolio choice; investment decisions, financial forecasting and simulation, production; cost; capital, total factor, and multifactor productivity; capacity, criteria for decision-making under risk and uncertainty