On Misunderstandings in Project Economic Evaluation Theory

Abstract

This article proves that IRR does not conform to the economic meaning of marginal income from the perspective of theory and practical application. Only the net present value rate NPVR and the net investment return rate N/K conform to the economic meaning of marginal income. This also theoretically explains why the use of IRR sorting cannot guarantee the optimal portfolio of selected projects when funding constraints do not cut projects. Therefore, the use of index rankings other than NPVR or N/K lacks theoretical basis and can only be an approximate method in practical applications.