Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Do NPV and IRR Measure the Profitability of Investment Opportunities? Conditions as Measures of Profitability

NPV와 IRR은 투자기회들의 수익성을 측정하는가? 수익성 척도로서 조건들

  • Jinwook, Kim (Department of Industrial & Systems Engineering, Changwon National University)
  • 김진욱 (창원대학교 산업시스템공학과)
  • Received : 2022.11.09
  • Accepted : 2022.12.13
  • Published : 2022.12.31
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Abstract

Investors must adopt profitable investment opportunities to maximize their wealth. Almost all investment, finance, engineering economics textbooks explain that net present value (NPV) measures the profitability (or value) of investment opportunities in absolute size, and internal rate of return (IRR) measures the profitability of investment opportunities in relative proportions. However, NPV is a measure of the relative size of the return on investment opportunity to do-nothing alternative. Moreover, IRR can occur in multiple investment opportunities and may not exist. To make matters worse, IRR and NPV also have conflicting problems in accept-or-reject decisions. In this study, the reason why NPV and IRR cannot accurately measure the profitability of investment opportunities is identified, and fundamental characteristics that investment opportunity profitability measures should have are presented.

Keywords

Acknowledgement

This research was supported by the Changwon National University in 2021-2022.

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