Analysis of the misunderstanding in investment project economic appraisal theory

Abstract

The In investment project economic appraisal theory, the internal rate of return (IRR) is often used as the project marginal revenue to ascertain project optimal scale and gain the minimum attractive rate of return (MARR). This paper proves that only the net present value ratio (NPVR) and the net invest-profit rate (N/K) , but not the internal rate of return(IRR), can accord with the meaning of marginal revenue from the theoretical and practical point of view. Which is also the reason that IRR ranking method can't guarantee the selection result optimal when capital rationing doesn't divide up the project. That is, except for NPVR and N/K, all the other indicators ranking methods are lack of theoretical basis, and only can be used as approximate methods in practical application.