The Internal Rate of Return Approach and the AIRR Paradigm: A Refutation and a Corroboration

Carlo Alberto Magni

The Engineering Economist, 2013, vol. 58, issue 2, 73-111

Abstract: This article 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 18 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.

Date: 2013
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Citations: View citations in EconPapers (29)

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Working Paper: The Internal-Rate-of-Return approach and the AIRR paradigm: A refutation and a corroboration (2012)
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DOI: 10.1080/0013791X.2012.745916

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