Talk:Internal rate of return

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"interest rate" should be replaced with "discount rate"

[edit] IRR limitations

As an investment decision tool the IRR can be misleading in the case, that the money bound in an investment is verly little or changing very much. This is the situation if investments are financed with debt. The computation of the IRR from the cash flows may result a highly positive IRR. But on very little capital bound. So you are ending with an investment that bears a high risk because of the loan and a little positive cash flow. In this cases it is better to calculate the NPV, because one may recognizies the the small value compared to the high loan. Another example is stocktrading where the money is not always invested. Therfore the bound capital is changeing very much over the investment duration and the calculated IRR is too high.

An in-deep discussion of strong points and limitations of IRR probably someone writing about this should take into account.

[edit] dollar-weighted return

I see 193.30.236.72 has removed my statement that this is also known as dollar-weighted return. I wonder why, as this is a common term. See, for example, "Investments" (1999) by Sharpe, Alexander, and Bailey, page 827. If your objection to this is the US centrism of "dollar", then I propose "money-weighted return". This is to be contrasted with time-weighted return, which is just another name for the geometric mean rate of return. What do others think? Btyner 03:22, 23 August 2005 (UTC)

You are in the right - there are two types of RR's that I know of: Dollar-weighted Rate of Return, and Time-weighted Rate of Return. Dollar-weighted is just another way of saying IRR.

[edit] external Weblink

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