The Weighted Internal Rate of Return (Wirr) and Expanded Benefit-Cost Ratio (Eb/Cr)

Universidad Javeriana Working Paper No. 9

20 Pages Posted: 24 Oct 2000

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: September 19, 2000

Abstract

The purpose of this paper is twofold: the first purpose is to tell a naive history of an experience in constructing knowledge. In this first part I tell how I approached the process to solve the inconsistency between the net present value, NPV, the internal rate of return, IRR and the benefit-cost ratio B/CR or profitability index. There are improvements and drawbacks, mistakes and successes. I think this is important for our students because sometimes they might believe that discovering new ideas or new approaches is an insurmountable job. Sometimes it is, but they have to learn that this is a cumulative process with advances and drawbacks and sometimes it is necessary to start again and start from scratch. The second purpose is to study the development of a procedure to include the implicit assumptions of NPV in the IRR and the profitability index (benefit-cost ratio B/CR). The resulting indicators are named the weighted IRR (WIRR) and the expanded B/CR (EB/CR). These two desirability measures have the property to coincide with the NPV ranking for investment analysis and hence, will maximize value. Examples are presented.

Keywords: Net present value, NPV, internal rate of return, IRR, benefit-cost ratio, B/CR, profitability index, NPV assumptions, overall rate of return, modified internal rate of return, MIRR.

JEL Classification: D92, E22, E31, G31

Suggested Citation

Velez-Pareja, Ignacio, The Weighted Internal Rate of Return (Wirr) and Expanded Benefit-Cost Ratio (Eb/Cr) (September 19, 2000). Universidad Javeriana Working Paper No. 9. Available at SSRN: https://ssrn.com/abstract=242867 or http://dx.doi.org/10.2139/ssrn.242867

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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