Using Heuristics to Evaluate Projects: The Case of Ranking Projects by IRR
作者:
DANIEL ASQUTTH,
JENNIFERE. BETHEL,
期刊:
The Engineering Economist
(Taylor Available online 1995)
卷期:
Volume 40,
issue 3
页码: 287-294
ISSN:0013-791X
年代: 1995
DOI:10.1080/00137919508903154
出版商: Taylor & Francis Group
数据来源: Taylor
摘要:
This paper examines the use of a simple heuristic for evaluating projects. We posit that ranking projects by IRR and rejecting marginal projects can be superior to a NPV rule if 1) project managers have incentives to overstate cash flow forecasts that occur late in a project's life, 2) project rankings determine project acceptance because not all positive NPV project's are accepted, and 3) a project's IRR is greater than the WACC. In these instances, the IRR heuristic undervalues distant cash flows and thus, reduces project managers' incentives to positively bias forecasts.
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