This paper shows that the Internal-Rate-of-Return (IRR) approach is unreliable, and that the recently introduced Average-Internal-Rate-of-Return (AIRR) model constitutes the basis for an alternative theoretical paradigm of rate of return. To this end, we divide the paper into two parts: a pars destruens and a pars construens. In the “destructive” part, we present a compendium of eighteen flaws associated with the IRR approach. In the “constructive” part, we construct the alternative approach from four (independent) economic intuitions and put the paradigm to the test by showing that it does not suffer from any of the flaws previously investigated. We also show how the IRR, as a rate of return, is absorbed into the new approach.

The Internal Rate of Return approach and the AIRR paradigm: a refutation and a corroboration / Magni, Carlo Alberto. - In: THE ENGINEERING ECONOMIST. - ISSN 0013-791X. - STAMPA. - 58:2(2013), pp. 73-111. [10.1080/0013791X.2012.745916]

The Internal Rate of Return approach and the AIRR paradigm: a refutation and a corroboration

MAGNI, Carlo Alberto
2013

Abstract

This paper shows that the Internal-Rate-of-Return (IRR) approach is unreliable, and that the recently introduced Average-Internal-Rate-of-Return (AIRR) model constitutes the basis for an alternative theoretical paradigm of rate of return. To this end, we divide the paper into two parts: a pars destruens and a pars construens. In the “destructive” part, we present a compendium of eighteen flaws associated with the IRR approach. In the “constructive” part, we construct the alternative approach from four (independent) economic intuitions and put the paradigm to the test by showing that it does not suffer from any of the flaws previously investigated. We also show how the IRR, as a rate of return, is absorbed into the new approach.
2013
58
2
73
111
The Internal Rate of Return approach and the AIRR paradigm: a refutation and a corroboration / Magni, Carlo Alberto. - In: THE ENGINEERING ECONOMIST. - ISSN 0013-791X. - STAMPA. - 58:2(2013), pp. 73-111. [10.1080/0013791X.2012.745916]
Magni, Carlo Alberto
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11380/827735
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