Billy Bogart. bbogart@buildingownersofnyc.com
Both have limitations, but the IRR, which is the most widely used measure, is the worse. The IRR is misleading. The NPV rule says that the investor should rank all investments in descending order of the NPV. Assuming that the investments are independent, the NPV works. However, if there is a budget or any other constraint, then the investments are not independent. The NPV rule can fail; including the highest NPV project may not be optimal. Development projects are replete with constraints, most of which violate the independence assumption. Introduction of uncertainty with side constraints complicates matters even more.
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