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
Date Written: November 9, 2012
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: Suggested Citation