Okay, today I have after doing the review of last three weeks, emphasizing week three, picked up again on IRR. And I've tried to show you through examples as hopefully always the problems with this measure. And I focus on this measure as not something that I propose you use and certainly is not something that is completely flawed, but it's in the middle and that's when things become a little bit dicey. So let's walk through the propertied of IRR. There are other measures, which I won't talk about. I'll talk about, I've talked about NPV and we'll run with it after this for the entire class. I've talked about payback and kind of pushed it aside. It doesn't make sense. IRR makes a lot of since, but here are the properties I'm concerned about. So let's start. The first property, we said, is does it make sense? And here, what I would like to do is, I would like to kind of scribble some parts. I know my writing is not the best in the world, but [LAUGH] hopefully, while I'm talking and writing, it makes life simple for you. So, does it make sense? Maybe. And the reason is, lot of people like rates of return. They come naturally to us. Percentages or life. So maybe it does make sense, and maybe that's what creates a little bit of problem. However, I would put maybe with a bunch of question marks because it's, at a gut level it makes sense, we naturally gravitate towards it but that doesn't mean it's right, right? So a lot of things are seductive and seemingly right, but there are issues and that's why we learn and try to investigate. Unit of measurement, as I said, the make sense part is a very broad question, and now we are digging deep. So what's the unit of measurement? Remember I told you that I think, the more I think about life, and more I think about something I know a lot about, I try to dig into what the heck is going on. Now what is a unit of measurement? In some senses, it's very cool it's unit free, right? It's a number, it's a percentage so that's cool. But what the danger is, what is the relationship between this and a value measurement How do we measure value? We measure value in terms of something that's acceptable right around. So if I told you a product has 25% rate of return, you may feel good about it, but you have to ask yourself, what does it mean in terms of value measurement? And here's the problem, value measurement usually would be either in dollars or in rupees or whatever your currency is. So there's really no connection between the two, and that's why you have a rule of thumb work. Even if you use IRR what do you have to compare it to? The alternative best. Why? Because that process hides value behind it. In other words, if IRR is greater than R in a simplistic world, you are creating positive value. So the unit of measurement being a percentage, makes you very cautious. Why? Because it's not directly value. Benchmark obvious? I think the benchmark is not obvious if you're looking internally, right? So what's the benchmark? Which one better than the other? That really is not a good thing. In dollars it is because it's a measurement, but in percentages maybe not. Okay? So, what is the benchmark? This is the benchmark. So if you dig deep and you realize that rate of returns are by themselves don't mean much, you have to compare them with some, what is the benchmark? What would I have earned elsewhere instead of giving you my money? Right? And that else where is a deep number. It's obvious at some level, but we'll spend a lot of time in figuring it out. And which of the methods I've suggested automatically builds it in? NPV. So, NPV forces me to do everything right? And is one number in the end. It's wrong, because it's based on expectations, but the process of thinking is right and if you have a very high positive number in the NPV calculations chances are that you have found something valuable. Easy to communicate, now this may be it's strength. Yes. It's very easy to stand up and say your rates of return, in my idea, is 20%. I think everybody nods, and everybody says, man that's cool. So it's easy to communicate, but is it? By itself very easy to communicate. But to say, is this value creating or not, what do you have to come up with? This. So, in some senses it's easy to communicate in isolation. But in value creation context it's not. Look how much time it took trying to figure out what is IRR trying to tell us. So again, at the superficial level, like it makes sense at a real superficial level. It's easier to communicate in a superficial way. And by the way, it's used left, right, and center. You know what's sad about it is? Even when we know it's a deceptive measure, we still use it, and I'll come to that in a second. Is it easy to compare ideas? Answer is, absolutely not. Because direct comparisons using IRR are extremely deceptive for, I just showed you they are two biases which are very devious. One is small scale. It favors small, Mickey Mouse ideas. And it favors the short term. Easy to calculate? Here's the tragedy if it. Answer is no. Again, why? Because we have to depend on an Excel because of compounding. So the answer is, it's not even easier to calculate. It's more difficult than NVP. So any other thoughts, please feel free to add. So I want to wrap this session up on decision criteria with one simple thought. And that is, if you use these things listed on the, in front of you, to kind of evaluate the ones we have covered. And ones we have not covered, and you can read about. What you'll find, is the one that come, sticks out. And still not perfect, is NPV. IR, is used more. So you have to be a little bit careful when you're using IRR. In fact, I would say the following. There's no need to use it really if you know how to do NPV. And that's where we'll stop. We'll keep coming back to this issue later and I'll tell you when is it okay to compare IRRs and when it's not. So in the context of value creation, real projects. Try to stay away from them. Try to stay away from IRR, why? Because scales are different, IRR is deceptive. Short term, long term, IRR is deceptive. And by the way, if the risks of the projects are different IRR is also very deceptive. We'll get to that later, because we haven't talked about risk. So let's stop now. I know I'm taking breaks in this time because IRR is tough to understand. But this is a natural break before we go to the next topic. Which is cash flows and remember you can start off right away if you don't want a break. Stop now, I'll take a break will come back start talking about the one ingredient common to all measures is cash flows. Talk to you soon, see you soon, bye.