Internal rate of return (IRR) - a flawed and dysfunctional project-evaluation criterion

For decades, the internal rate of return (IRR) project-evaluation criterion has been under increasing criticism. Torries (1998a) defends the beleaguered criterion. He claims that, as a project-evaluation and ranking instrument, the IRR is as suitable as the net present value (NPV). Torries also maintains that using the IRR to rank projects does not require the incremental approach and introduces his own alternative ranking approach. This paper disputes Torries' pro-IRR arguments and demonstrates that the IRR is a theoretically flawed and operationally dysfunctional criterion whose true meaning has persistently been misinterpreted. In a forthcoming paper by the author it will be shown that Torries' IRR-based project-ranking approach is flawed as well.