A Sufficient Condition for a Unique Nonnegative Internal Rate of Return-- Comment

Aucamp, Donald C.; Eckardt, Walter L.

doi:10.2307/2979057

Cited by 17 publications

(13 citation statements)

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“…Norstrøm's [7] proposition is the second sentence of Rule 3. Aucamp and Eckardt [1] give essentially the following rule. A sequence of cash flows has exactly one internal rate if the cash balance changes sign an odd number of times and if the sum of the cash balances before the first change of sign is at least as great in absolute value as the sum of all cash balances of the opposite sign between the first and last changes of sign.…”

Section: Remarksmentioning

confidence: 99%

Evaluating and Comparing Projects: Simple Detection of False Alarms

Pratt¹,

Hammond²

1979

The Journal of Finance

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Section: Remarksmentioning

confidence: 99%

Evaluating and Comparing Projects: Simple Detection of False Alarms

Pratt¹,

Hammond²

1979

The Journal of Finance

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“…The economic and managerial literature has thoroughly investigated the IRR shortcomings and a huge amount of contributions in the past eighty years have been devoted to searching for corrective procedures capable of healing its flaws (e.g. Boulding 1935, 1936b, Samuelson 1946Lorie and Savage 1955;Solomon 1956;Hirshleifer 1958;Pitchford and Hagger 1958;Bailey 1959;Karmel 1959;Soper 1959;Wright 1959;Kaplan 1965Kaplan , 1967Jean 1968;Arrow and Levhari 1969;Adler 1970;Ramsey 1970;Norstrøm 1967Norstrøm , 1972Flemming and Wright 1971;Fairley and Jacoby 1975;Aucamp and Eckardt 1976;Bernhard 1967Bernhard , 1977Bernhard , 1979Bernhard , 1980De Faro 1978;Herbst 1978;Ross, Spatt and Dybvig 1980;Dorfman 1981;Cannaday, Colwell and Paley 1986;Gronchi 1986;Hajdasinski 1987Hajdasinski , 2004Promislow and Spring 1996;Tang and Tang 2003;Rocabert, Tarrío and Pérez 2005;Zhang, 2005;Kierulff 2008;Simerská 2008).…”

Section: Introductionmentioning

confidence: 99%

“…In particular, Pitchford and Hagger (1958), Soper (1959), Kaplan (1965Kaplan ( , 1967, Gronchi (1986) individuate classes of projects having a unique real-valued IRR in the interval ሺെ1, ∞ሻ. Jean (1968), Norstrøm (1972), Aucamp andEckardt (1976), De Faro (1978), Bernhard (1979Bernhard ( , 1980 individuate classes of projects with a unique IRR in the interval ሺ0, ∞ሻ. Karmel (1959), Arrow and Levhari (1969), Flemming and Wright (1971), Ross, Spatt and Dybvig (1980) use the 1 For example, the cash flow stream ሺെ4, 12, െ9ሻ has a unique IRR equal to 50%.…”

Section: Introductionmentioning

confidence: 99%

Average Internal Rate of Return and Investment Decisions: A New Perspective

Magni

2010

The Engineering Economist

133

104

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The internal rate of return (IRR) is often used by managers and practitioners for investment decisions. Unfortunately, it has serious flaws: (i) multiple real-valued IRRs may arise, (ii) complex-valued IRRs may arise, (iii) the IRR is, in general, incompatible with the net present value (NPV) in accept/reject decisions (iv) the IRR ranking is, in general, different from the NPV ranking, (v) the IRR criterion is not applicable with variable costs of capital. The efforts of economists and management scientists in providing a reliable project rate of return have generated over the decades an immense bulk of contributions aiming to solve these shortcomings. This paper offers a complete solution to this long-standing issue by changing the usual perspective: the IRR equation is dismissed and the evaluator is allowed to describe the project as an investment or a borrowing at his discretion. This permits to show that any arithmetic mean of the one-period return rates implicit in a project reliably informs about a project's profitability and correctly ranks competing projects. With such a measure, which we name "Average Internal Rate of Return", complex-valued numbers disappear and all the above mentioned problems are wiped out. The economic meaning is compelling: it is the project return rate implicitly determined by the market. The traditional IRR notion may be found back as a particular case.

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“…Proposition 5 (Bernhard 1979, 1980, Gronchi 1987 (See also Aucamp and Eckardt 1976, De Faro 1978, Pratt and Hammond 1977, 1979.…”

Section: Irr Acceptability Criterion Rule (I) An Investment Is Accementioning

confidence: 99%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

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A Sufficient Condition for a Unique Nonnegative Internal Rate of Return-- Comment

Cited by 17 publications

References 1 publication

Evaluating and Comparing Projects: Simple Detection of False Alarms

Evaluating and Comparing Projects: Simple Detection of False Alarms

Average Internal Rate of Return and Investment Decisions: A New Perspective

Capital depreciation and the underdetermination of rate of return: A unifying perspective

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