Aswath Damodaran 233
What firms actually use ..
Decision Rule % of Firms using as primary decision rule in
1976 1986
IRR 53. 6 % 49. 0 %
Accounting Return 25. 0 % 8. 0 %
NPV 9. 8 % 21. 0 %
Payback Period 8. 9 % 19. 0 %
Profitability Index 2. 7 % 3. 0 %
Why do so many firms pick IRR, if NPV is the superior approach?
Because many firms, whether it is true or not, perceive themselves to be
operating with a capital rationing constraint.
Most decision-makers, for whatever reason, are more comfortable
looking at percentage rates of return rather than dollar values.
