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Okay. Today, I have after doing a review of last three weeks, emphasizing Week

Â three, picked up a game on IRR. And I've tried to show you through examples, as

Â hopefully always, the problems with this measure. And I have focused on this

Â measure as not something that I propose you use and certainly as not something

Â that's completely flawed but it's in the middle and that's when things become a

Â little bit dicey. So, let's walk through the properties of IRR. There are other

Â measures which I won't talk about. I'll talk about, I've talked about NPV and

Â we'll run with it after this for the entire class. I've talked about payback

Â and kind of pushed it aside, it doesn't make sense. Irr makes a lot of sense. But

Â here are the properties I'm concerned about. So, let's start. The first property

Â we said, is, does it make sense? And here, what I would like to do is I would like to

Â kind of scribble some thoughts. I know my writing is not the best in the world but

Â hopefully while I'm talking and writing it, it makes life simple for you. So, does

Â it make sense? Maybe. And the reason is lot of people like rates of return. They

Â come naturally to us, percentages of life. So, maybe it does make sense and maybe

Â that is what creates little bit of problem. However, I would put maybe with a

Â bunch of question marks because its, its, at a gut level, it makes sense. We

Â naturally gravitate towards it but that doesn't mean it is right, right? So, a lot

Â of things are seductive and seemingly right but there are issues and that is why

Â we learn and try to investigate. Unit of measurement. As I said, the make sense

Â part is a very broad question and now we are digging deep. So, what's the unit of

Â measurement? Remember, I told you that I think the more I think about life and more

Â I think about something that I know a lot about, I try to dig into what the heck is

Â going on. Now, what is the unit of measurement? In some senses, it's very

Â cool. It's unitary, right? It's a number, it's a percentage. So, that's cool. But

Â what the danger is, wh at is the relationship between this and her value

Â measurement? How do we measure value? We measure value in terms of something that's

Â acceptable right around.So, if I told you a project has 25 percent rate of return,

Â you may feel good about it, but you have to ask yourself, what does it mean in

Â terms of value measurement? And here is the problem, value measurement, usually,

Â would be either in dollars, or in rupees, or whatever your currency is. So, there's

Â really no connection between the two. And that's why you have the rule of thumb,

Â what? Even if you use IRR, what do you have to compare it to? The alternative

Â best. Why? Because that process hides value behind it. In other words, if IRR is

Â greater than R in a simplistic world, you are creating positive value. So, the unit

Â of measurement being a percentage, make you very cautious. Why? Because it's not

Â directly value. Benchmark, obvious? I think the benchmark is not obvious if

Â you're looking internally, right? So, what's the benchmark or is one better than

Â the other? That really is not a good thing. In dollars, it is, because it's a

Â measurement but in percentage, maybe nine. Okay? So, what is the benchmark? This is

Â the benchmark. So, if you dig deep and you realize that rate of returns are by

Â themselves don't mean much, you have to compare them with sum. What is the

Â benchmark? What would have I earned elsewhere instead of giving you my money,

Â right? And that, elsewhere, is a deep numb, its obvious at some level but we'll

Â spend a lot of time thiking it out and which of the methods, I've suggested

Â automatically builds it in NPV. So, NPV forces me to do everything right. And is

Â one number in the end. It's wrong, because it's based on expectations. But the

Â process of thinking is right. And if you have a very high positive number in the

Â NPV calculations, chances are that you're, it's found something valuable. Easy to

Â communicate. Now, this may be its strength. Yes, it's very easy to stand up

Â and say, you know, your rates of return in my idea is twenty%. I think everybody nods

Â and then everybody says, man, that's cool. So, it's easy to communicate, but is it?

Â By itself, it's very easy to communicate but to says is this value creating or not,

Â what do you have come out of it, this? So, in some sense, it's easy to communicate in

Â isolation but in value creation context, it's not. Look on how much time it took

Â trying to figure out, what is he trying to tell us. So, again, at a superficial level

Â like it makes sense at a real superficial level, its easy to communicate in a

Â superficial way. And, by the way, it's used left, right, and center. You know,

Â what's sad about it is even when we know it's a deceptive measure, we still use it.

Â And I'll come to that in a second. Is it easy to compare ideas? [unknown] says,

Â absolutely not. Because direct comparisons using IRR are extremely deceptive for I

Â just should you that two biases which are very devious, one is small, small scale,

Â it favors small mickey mouse ideas, and it favors the short term. Easy to calculate,

Â here is the tragedy of it. Answers, no, again. Why? Because we have to depend on

Â an Excel, because of compounding. So, the answer is, it is not even easy to

Â calculate, it's more difficult than NPV. So, any other thoughts, please feel free

Â to add. So, this, I want to wrap this session up on decision criteria with one

Â simple thought and that is if you use these, these criteria, these things listed

Â on the, in front of you to kind of evaluate the ones we have covered and ones

Â we have not covered and you can read it back, what you'll find is the one that

Â comes sticks out and still not perfect is NPV. Irr is used more so you have to be a

Â little bit careful when you're using IRR. If fact, I would say the following,

Â there's no need to use it, really, if you know how to do NPV. And that's where we'll

Â stop, we'll keep coming back to this issue later and I'll tell you when is it okay to

Â compare IRRs and when it's not. So, in the context of value creation, real projects,

Â it's trying to stay away from that, try to stay away from IRR. Why, beca use scales

Â are different, IRR is deceptive. [foreign] IRR is deceptive. And, by the way, if the

Â risks of the projects are different, IRR is also very deceptive. We'll get to that

Â later, but, because we haven't talked about risk. So, let's talk now, I know I'm

Â taking breaks in this time because IRR is tough to understand but this is a natural

Â break before we go to the next topic, which is cash flows. And remember, you can

Â start off right away, if you don't want a break. Stop now, I'll take a break, we'll

Â come back and start talking about the one ingredient common to all measures, is cash

Â flows, Talk to you soon. See you soon, bye.

Â