Multiple Internal Rate of Return Revisited: Frequency of Occurrences

Ng, Ean-Harn; Beruvides, Mario G.

doi:10.1080/0013791x.2013.865149

Cited by 13 publications

(6 citation statements)

References 40 publications

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“…In fact, some authors [27] show that the DCF approach, in particular the calculation of IRR, does not take into account, among other criticalities, that: (a) multiple real-value IRRs may arise; (b) complex-valued IRRs may arise; (c) IRR ranking is generally different from NPV ranking; (d) IRR criterion is not applicable with variable cost of capital; (e) the IRR does not measure the return on initial investment; and (f) the IRR does not signal the loss of entire capital. To overcome these limits [28][29][30][31] a development of IRR's approach defined as the "average internal rate of return" (AIRR) with the aim of achieving a conceptual shift where the rate of return does not depend on cash flows but on the invested capital is suggested.…”

Section: Methodsmentioning

confidence: 99%

“…Other authors have focused their attention on restoring the environmental integrity of urban areas by assessing construction practices aiming to increase environmental characteristics, as rooftop vegetation, called green roofs, could be considered an alternative to traditional roofing [25,26]. When an investment could generate positive cash flow, a discounting cash flow (DCF) approach is applied to jointly evaluate cash inflow and outflow generated by the investment; a DCF approach is generally applied to investment, particularly for long-term investment in contest of risk, even if the DCF approach is judged to have limitations in the case of dichotomous choice and even regardless of the consistency of DCF ratios [27][28][29][30][31]. Moreover, the DCF approach is still considered to be the standard approach in financial evaluation.…”

Section: Introductionmentioning

confidence: 99%

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Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow (DCF) Approach of Appraisal

Bonazzi

Iotti

2016

Sustainability

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Abstract:The objective of this article is to develop and apply a specific discounting cash flow (DCF) approach to evaluate investment in renovation to improve building quality, thus increasing energy efficiency. In this article, we develop and apply a specific net present value (NPV) and an internal rate of return (IRR) approach to quantify the value created for the owners of the building by the investment in renovation via energy-saving investments that produce positive externalities. The model has an applied interest because, in recent years, a lot of investments in real estate were made by owners in order to increase the green quality of the buildings, and several funds of public aid were provided by the government to stimulate these energy-saving investments. The model proposed here is applied to a case study of a 16-apartment building located in northern Italy considers the model attempts to quantify the initial investment value, the energy savings, the tax deduction of the initial investment and the terminal value of the investment as the increase in building value. The analysis shows that the model is consistent in evaluating investments to improve building quality, and investments within the context of the specific case study considered in the research have IRRs ranging from a minimum of 4.907% to a maximum of 12.980%. It could even be useful to consider a sample of cases to verify whether our results are representative of this specific case study. The model could represent a useful tool for consumers in evaluating their own investments in building renovation, from a stand-alone perspective and even by comparing them with other types of investment. The research could be developed in the future to quantify the social welfare generated by public spending via tax deductions to reduce the costs of investment in energy savings for buildings and could even be applied to new real estate projects in comparing different construction technologies and even comparing the return of renovation investment with other investments not even in the real estate sector.

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Section: Methodsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow (DCF) Approach of Appraisal

Bonazzi

Iotti

2016

Sustainability

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“…These procedures are an attempt to explain and find a logical meaning to the different IRRs of a cash flow stream. The fourth group examines situations that are likely to be encountered by practitioners, to determine whether the IRR flaws mentioned above (in particular multiple real positive IRRs) are present [25][26][27].…”

Section: State Of the Artmentioning

confidence: 99%

Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?

2018

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Public Private Partnerships (PPP) are viewed by the private sector as investment projects. An investment criterion, such as the internal rate of return (IRR), widely used by practitioners, is thus necessary in order to determine if the opportunity is sustainable from an economic point of view and worth pursuing. However, a cash flow may have multiple IRRs—is it appropriate in the context of PPPs to use this criterion? This paper provides a clear proposition to determine the potential number of real positive IRRs a cash flow may have, depending on the number of sign variations and the value of the net present value (NPV) calculated with a discount rate equal to 0 (NPV(r = 0)). This proposition can sometimes be used when other tests (such as Norstrom’s Criterion) are inconclusive to determine if a cash flow has a single real positive IRR. The proposition is generally met by the typical cash flow of a PPP project, validating the use of IRR as an investment criterion.

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“…IRR, even if characterized by several limitations, is thus one of the most applied and well known approach in investment evaluation. Firstly, in fact, IRR as a criterion for choosing between alternative investments (maximum IRR), suffers from a lack of consideration of the opportunity cost of capital in the calculation and risk of multiple solutions (Ben-Horin and Kroll, 2012;Magni, 2013;Ng and Beruvides, 2015) and does not consider financial constraints (Bagella et al, 2001;Caggese, 2007). We suggest making a choice between alternative investments by basing judgments on the largest positive difference between the IRRE and the discount rate (Ke) quantified for each investment, as follows Equation 17:…”

Section: Irr Approachmentioning

confidence: 99%

Evaluation of Biogas Plants by the Application of an Internal Rate of Return and Debt Service Coverage Approach

Bonazzi¹,

Iotti²

2015

American Journal of Environmental Sciences

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Energy production using renewable energy has an effect on environmental sustainability and on public expenditure. In fact, this industry is heavily assisted by public support from the European Union and the Italian State. Developing and applying a method to evaluate the return on investment for companies operating in the field of renewable energy allows them to quantify their efficient use of public resources. In this research we develop an assessment method that combines the rate of return on equity capital (IRRE) and financial viability (DSCR), in which IRRE > Ke and sub DSCR >1 for any given period of the investment. This method enables us to quantify both the equity capital return and financial sustainability. The method is applied to a case study of a company's production of biogas from livestock effluents located in the province of Reggio Emilia, Italy. The analysis shows that biogas investment guarantees financial sustainability, even in the case of financial liabilities, in the case examined. It also shows that IRRE is higher than average, with a return on equity assured both by market average (MRP) and government bonds in the long term. The research could be further developed by quantifying the social welfare generated by public spending and private investment as equity capital, both in terms of its activation of the economy and in terms of assessing the environmental effects that qualify as externalities.

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Multiple Internal Rate of Return Revisited: Frequency of Occurrences

Cited by 13 publications

References 40 publications

Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow (DCF) Approach of Appraisal

Evaluation of Investment in Renovation to Increase the Quality of Buildings: A Specific Discounted Cash Flow (DCF) Approach of Appraisal

Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?

Evaluation of Biogas Plants by the Application of an Internal Rate of Return and Debt Service Coverage Approach

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