Validity of NPV rule and IRR criterion for Capital Budgeting and Cost Benefit Analyses

Abstract

The validity of the NPV and IRR rules is evaluated and presented. With normal net cash flow:
a. The NPV and IRR estimates lead to the same decision, b. Neither the NPV nor the IRR always involves reinvestment; c. reinvestment might make the NPV spurious with low discount rates, but the IRR remains unique. With nonnormal net cash flow: a. spurious NPVs and multiple IRRs coexist; b. A capital amortisation method eliminates reinvestment and resolves the problems of multiple IRR and spurious NPV and enables estimation of IRR on total capital and or balance of capital. c. IRR ranks consistently more than NPV.