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

Carlo Alberto Magni

No 10084, Proyecciones Financieras y Valoración from Master Consultores

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 previouslyinvestigated. We also show how the IRR, as a rate of return, is absorbed into the new approach.

Keywords: Internal rate of return; capital; average; net present value (search for similar items in EconPapers)
JEL-codes: G00 G11 G12 G30 G31 M41 (search for similar items in EconPapers)
Pages: 40
Date: 2012-11-08
References: Add references at CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:010084

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