All Else Equal: Making Better Decisions Ep75 The Misleading Truth Behind IRR
Apr 2, 2026
A critique of IRR as an investment rule, highlighting its multiple or missing solutions and sensitivity to cash flow signs. Discussion of how IRR ignores scale and timing, favoring percentages over absolute value. Examination of how financing and payment plans can make IRR misleading or arbitrarily inflated. A clear case for using NPV as the proper decision metric.
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NPV Is The Correct Money Measure
- NPV compares all costs and benefits by bringing them to present value using a discount rate.
- Jules van Binsbergen explains NPV answers whether benefits today exceed costs today after discounting future cash flows.
IRR Is A Breakeven Discount Rate
- IRR is the break-even discount rate that makes NPV equal to zero and serves as a sensitivity check.
- Jonathan Berk says IRR is useful as a breakeven rate to see how far your discount-rate estimate can be off.
Sign Changes Cause Multiple IRRs
- IRR can produce multiple or no solutions when cash flows change sign over time, making the rule ambiguous.
- Jonathan Berk uses textbook advances and later royalties to show NPV curves can be U-shaped, yielding multiple IRRs.