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What is an Investment Project's Implied Rate of Return?
Author(s) -
Bornholt Graham
Publication year - 2017
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12093
Subject(s) - internal rate of return , rate of return , measure (data warehouse) , modified internal rate of return , return on investment , economics , investment (military) , time weighted return , net present value , investment performance , actuarial science , econometrics , finance , computer science , microeconomics , production (economics) , database , politics , political science , law
How to measure a project's implied rate of return has long been an unresolved problem, except for some special cases. This paper derives return on present cost (ROPC) as the correct measure of an investment project's implied rate of return. The IRR is a biased measure except for projects classified as simple projects, and this bias is likely to be substantial in many real‐world applications. Thus while net present values should be used to determine whether to accept/reject projects, I recommend that analysts use ROPC in place of the IRR as a measure of a project's true rate of return.