Addendum to ‘Average Internal Rate of Return and Investment Decisions: A New Perspective’
The Engineering Economist, 56(2), 181-182
3 Pages Posted: 7 Mar 2011 Last revised: 3 Oct 2013
Date Written: March 3, 2011
This note specifies some results found in [Magni 2010. The Engineering Economists, 55(2), 150-180] where the Average Internal Rate of Return (AIRR) is presented, which overcome all the IRR difficulties. In particular, the AIRR approach enables to prove that (1) a project is not uniquely associated with a return rate, but with a return function, which maps aggregate capitals to rates of return; (2) any definition of rate of return appearing in the (past and) future literature is a particular case of AIRR; (3) for choices between mutually exclusive projects, the AIRR acceptability criterion may be applied to the incremental project; (4) the AIRR approach easily provides the evaluator with the rate of return on initial investment, whereas the IRR is only the rate of return on an aggregate capital which is internally implied by the IRR itself.
Keywords: rate of return, capital investment analysis, internal rate of return, AIRR
JEL Classification: G11, G12, G31
Suggested Citation: Suggested Citation