A Quasi-IRR for a Project Without IRR

17 Pages Posted: 5 Apr 2011 Last revised: 8 Dec 2014

See all articles by Flavio Pressacco

Flavio Pressacco

Università degli Studi di Udine

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Patrizia Stucchi

Università degli Studi di Udine

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2011

Abstract

Discounted cash flows methods such as Net Present Value and Internal Rate of Return are often used interchangeably or even together for assessing value creation in industrial and engineering projects. Notwithstanding its difficulties of applicability and reliability, the internal rate of return (IRR) is massively used in real-life applications. Among other problems, a project may have no real-valued IRR, a circumstance that may occur in projects which require shutting costs or imply an initial positive cash flow such as a down payment made by a client. This paper supplies a genuine IRR for a project which has no IRR. This seemingly paradoxical result is achieved by making use of a new approach to rate of return (Magni, 2010), whereby any project is associated with a unique return function which maps aggregate capitals into rates of return. Each rate of return is a weighted average of one-period (internal) rates of return, so it is called "Average Internal Rate of Return" (AIRR). We introduce a twin project which has a unique IRR and the same NPV as the original project's, and which is obtained through an appropriate minimization of the distance between the original project's cash flow stream and the twin project's. Given that the latter's IRR lies on the original project's return function, it represents an AIRR of the original project. And while it is not the IRR of the project, the measure presented is `almost' the IRR of the project, so it is actually the "quasi-IRR'' of the project.

Keywords: Investment Analysis, Capital Budgeting, Average Internal Rate of Return (AIRR), Return Function, Net Present Value, Outstanding Capital

JEL Classification: G31, G11, G12, C0

Suggested Citation

Pressacco, Flavio and Magni, Carlo Alberto and Stucchi, Patrizia, A Quasi-IRR for a Project Without IRR (April 1, 2011). Frontiers in Finance and Economics, 11(2), 1-23, 2014., Available at SSRN: https://ssrn.com/abstract=1800348 or http://dx.doi.org/10.2139/ssrn.1800348

Flavio Pressacco

Università degli Studi di Udine ( email )

Via Tarcisio Petracco, Palazzo antonini, 8
Udine, 33100
Italy

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

Patrizia Stucchi

Università degli Studi di Udine ( email )

Via Tarcisio Petracco, Palazzo antonini, 8
Udine, 33100
Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
201
Abstract Views
1,453
rank
130,113
PlumX Metrics