COMMENTS ON “USING HEURISTICS TO EVALUATE PROJECTS: THE CASE OF RANKING PROJECTS BY IRR”

ABSTRACT

In their recent paper ( D. Asquith & J.E. Bethel, “Using Heuristics to Evaluate Projects: The Case of Ranking Projects by IRR,” The Engineering Economist, Vol. 40, No. 3 (Spring 1995, pp. 287-294) ), the authors propose a project ranking procedure that is supposed to mitigate the impact of cash flow overvaluation by project managers. In the current contribution, it is indicated that this procedure is based upon a project ranking approach that employs the IRR criterion in a theoretically inadequate way. The correct, incremental approach to the IRR-based project ranking is reiterated, and it is shown that if this approach is applied, then its very design reduces the impact of CF-biases on project ranking. It is also demonstrated that even if competing projects are of equal scale, they must still be ranked by incremental comparison. Finally, it is pointed out that the incremental project ranking is the proper approach regardless of which NPV-compatible profitability measure is applied.

Additional information

Notes on contributors

MIROSL/AW M. HAJDASIŃSKI

MIROSL/AW M, HAJDASIŃSKI holds a D.S. and an M.Sc. in Mining Engineering and a Ph.D. in Mine Economics from the University of Mining and Metallurgy in Cracow, Poland. Me also conducted research at the Technical University Clausthal, Germany, and at the Technical University Eindhoven, The Netherlands. In 1982, Dr. Haj-dasiński joined Laurentian University in Sudbury, Ontario. Canada, where be is currently o professor in the School of Engineering. His research focuses on project evaluation techniques and applications of Industrial Engineering and Operations Research in the Minerals Industry. Dr. Hajdasiński is a professional engineer registered in the province of Ontario.