Capital budgeting with an efficient yield-based method: the real rate of return technique

Olivier Rousse

Cahiers du CREDEN (CREDEN Working Papers) from CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1

Abstract: We develop a yield-based capital budgeting method that solves the inconsistencies of the internal rate of return (IRR) and its alternatives with the shareholders' wealth maximization objective. We thus provide an efficient technique for managers who exhibit in practice a large preference for comparing the merits of projects with rates of return. This new method, called the real rate of return (RRR), is an improvement of the modified internal rate of return (MIRR) based on the Fisher equation. Simple and fitting with managers' needs and way of thinking, the RRR has all the qualities to be accepted in practice.

Keywords: Capital budgeting; modified internal rate of return; net present value; profitability index; Fisher equation. (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2008
New Economics Papers: this item is included in nep-ppm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:mop:credwp:08.02.73

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