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

The Engineering Economist, 58(2), 73-111, 2013

41 Pages Posted: 10 Nov 2012 Last revised: 4 Jul 2014

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

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

Date Written: November 9, 2012

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

Keywords: rate of return, average, net present value, capital

JEL Classification: G30, G31, G11, G12, G00, M41

Suggested Citation

Magni, Carlo Alberto, The Internal-Rate-of-Return Approach and the AIRR Paradigm: A Refutation and a Corroboration (November 9, 2012). The Engineering Economist, 58(2), 73-111, 2013, Available at SSRN: https://ssrn.com/abstract=2172965

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

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