Aggregate Return on Investment and Investment Decisions: A Cash-Flow Perspective

Carlo Alberto Magni

The Engineering Economist, 2011, vol. 56, issue 2, 140-169

Abstract: The recent notion of average internal rate of return (AIRR; Magni 2010a, The Engineering Economist, 55(2), 150–180) completely solves the long-standing problem of the internal rate of return (IRR). Though the AIRR is a return measure, this article presents a cash-flow measure, namely, the ratio of net cash flow (i.e., cash inflows minus cash outflows) to capital invested, which we call aggregate return on investment (AROI). It is a purely internal measure because, unlike the AIRR, it does not depend on the market rate and is a return measure, because it is a mean of one-period return rates, weighed by the outstanding capitals. The AROI is reliable in both accept/reject decisions and project ranking, in association with an appropriate, economically significant hurdle rate: the comprehensive cost of capital (CCOC), which takes into account not only the interest foregone on the capital actually employed but also the interest foregone on the capital that is given up by the investor. This perspective enables one to decompose the project net present value (NPV) into an excess-rate share and an excess-capital share. The traditional IRR is just a particular case of both AIRR and AROI, but the latter approach has the advantage that the IRR's nature (rate of return versus rate of cost) does not depend on the market rate and is unambiguously determined by the capital invested.

Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1080/0013791X.2011.573617 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:uteexx:v:56:y:2011:i:2:p:140-169

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/UTEE20

DOI: 10.1080/0013791X.2011.573617

Access Statistics for this article

The Engineering Economist is currently edited by Sarah Ryan

More articles in The Engineering Economist from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().