An Alternative Way to Deconstruct Value : A Dual Expression for NPV and Its Applications

Conventional financial advice is that net present value (NPV) is a superior investment criterion to internal rate of return (IRR) because IRR has pitfalls. Despite the pitfalls, evidence shows most practitioners continue to employ IRR as an investment criterion. Such behavior is puzzling. This article argues the pitfalls are irrelevant to the choice between the two criteria. A new, dual equation for NPV is introduced based on multiple-interest-rate analysis. The dual equation deconstructs NPV in a novel way, clarifies the relationship between NPV and IRR, and provides practitioners with a more persuasive reason than the pitfalls to prefer NPV. Applications of the dual equation are given