Probability Distribution Function of the Internal Rate of Return for Short-Term Projects with Some Random Cash Flows and Extensions

Sarper, Hüseyin; Palak, Gökçe; Chacon, Paul; Fraser, Jane

doi:10.1080/0013791x.2010.524279

Cited by 7 publications

(3 citation statements)

References 22 publications

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“…There has been much discussion on Hillier's approach. See for example Sarper et al (2010). Hodges and Moore (1968, p. 359) comment that the approach may not be generally true, but is good enough for most practical purposes.…”

Section: Irrmentioning

confidence: 97%

The financial additionality and viability of CDM projects allowing for uncertainty

Carmichael

Lea

Balatbat

2015

Environ Dev Sustain

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Financial additionality and viability for Clean Development Mechanism (CDM) projects is commonly demonstrated through deterministic internal rate of return (IRR) benchmark analysis, supplemented with a sensitivity analysis. This method is vulnerable to assumptions on cash flows (including that from carbon credits) and is unable to differentiate grades of separation from the benchmark. This paper examines the financial additionality test and viability in the presence of cash flow uncertainty, where IRR becomes a random variable. A case example project involving wind power is exampled. It is seen that the boundaries between acceptance and rejection as a CDM project based on financial additionality and viability tests become blurred, leading to possible alternative conclusions. Comment is given on false positives and false negatives, in terms of acceptance and rejection of projects.

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Section: Irrmentioning

confidence: 97%

The financial additionality and viability of CDM projects allowing for uncertainty

Carmichael

Lea

Balatbat

2015

Environ Dev Sustain

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“…A useful review of the literature on probabilistic cash flow analysis is carried out by Carmichael and Balatbat (2008) who find that the research directly related to the subject of the probabilistic IRR is scant. However, more recently Sarper et al (2010) report closed-form probability distributions for the IRR for one-period and two-period capital budgets for which the cash flows are characterized by either uniform or exponential distributions. They note that, although one and two period capital budgets are rare, the task becomes much more difficult for budgets with a higher useful life.…”

Section: The Literaturementioning

confidence: 99%

“…Illustrative examples are provided for four cases. The first is when future cash flows follow a uniform distribution, which is a usual assumption in the literature (Sarper et al, 2010). The second is when future cash flows follow a normal distribution with the same mean and variance as the above uniform distribution.…”

Section: Introductionmentioning

confidence: 99%

A Probabilistic Internal Rate of Return: Theory and Illustration

Azar¹,

Noueihed²

2014

IJBM

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The purpose of this paper is to provide a theoretical background on the internal rate of return (IRR), on the probabilistic IRR, and to present an illustration based upon both a Taylor series expansion and a Monte Carlo simulation. It is shown that Monte Carlo simulation results in a more precise outcome as compared to the theoretical expectations from a Taylor series expansion. This precision is more than twice in terms of the standard deviations of the IRR, and around six times more in terms of the standard errors of the IRR. Second, the distributions of the internal rate of return follow approximately a normal distribution, and this allows a sound basis for project appraisal and risk management. Third, the grand means of the internal rates of returns for all four cases considered are statistically insignificantly different from each other, as expected, and they are statistically insignificantly different from the average internal rate of return, obtained by discounting the mean amounts of the cash flows. Fifth, the standard deviations and the standard errors of the IRR are directly proportional to the assumed standard deviations of the cash flows.

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Fuzzy IRR with Fuzzy WACC and Fuzzy MARR

Baş

2012

Communications in Computer and Information Science

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Probability Distribution Function of the Internal Rate of Return for Short-Term Projects with Some Random Cash Flows and Extensions

Cited by 7 publications

References 22 publications

The financial additionality and viability of CDM projects allowing for uncertainty

The financial additionality and viability of CDM projects allowing for uncertainty

A Probabilistic Internal Rate of Return: Theory and Illustration

Fuzzy IRR with Fuzzy WACC and Fuzzy MARR

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