On Investment Criteria Based on the Internal Rate of Return

Gronchi, Sandro

doi:10.1093/oxfordjournals.oep.a041728

Cited by 31 publications

(14 citation statements)

References 4 publications

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“…PBP and ARR) versus more complex algorithms such as NPV and IRR (Gordon 1955;Harcourt 1968;Sarnat and Levy 1969;Ramsey 1970;Dudley 1972;Wright 1978;Gronchi 1986). The use of algorithmic techniques can be problematic.…”

Section: A Comparative Analysis Of Approachesmentioning

confidence: 99%

Behind the black box: a survey of real-world investment appraisal approaches

Baddeley

2006

Empirica

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Section: A Comparative Analysis Of Approachesmentioning

confidence: 99%

Behind the black box: a survey of real-world investment appraisal approaches

Baddeley

2006

Empirica

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“…However (a) and (b), while formally extending the scope of application, limit Peccati's model from an economic point of view, as they represent very particular assumptions about possible ways of investing funds (case (a)) or about the value of the investor's wealth (case (b)). Actually, Pressacco and Stucchi do not deal with the case in which E 0 is nonzero and is invested in account C. 3 According to these definitions and due to the assumption C 0 = −a 0 , the NFV for P is…”

Section: Pressacco-stucchi's Modelmentioning

confidence: 99%

“…Evaluation of investments and decomposition of a cash flow stream under certainty has gained in recent years a renewed interest thanks to Gronchi (1986Gronchi ( , 1987, who generalizes the concept of internal rate of return, Peccati (1987Peccati ( , 1991Peccati ( , 1992, who decomposes a certain cash flow stream, Pressacco and Stucchi (1997), who generalize Peccati's model. In the same years, Stewart (1991) Added (EVA).…”

Section: Introductionmentioning

confidence: 99%

“…The problem of decomposing a cash flow has been treated in recent years by Gronchi (1986Gronchi ( , 1987, Peccati (1987Peccati ( , 1991Peccati ( , 1992, Stewart (1991), Pressacco and Stucchi (1997). After showing that the Economic Value Added introduced by Stewart bears a strong resemblance to (and in some conditions coincides with) the periodic Net Present (or Final) Value in Peccati's model and that Pressacco-Stucchi's model can be seen as a formal generalization of Stewart's model, this paper proposes a different decomposition model introducing the Systemic Value Added, which lends itself to a disaggregation in periodic shares whose uncompounded sum coincides with Peccati's and Pressacco-Stucchi's Net Final Value.…”

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confidence: 99%

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Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream

Magni

2007

SSRN Journal

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Abstract. The problem of decomposing a cash flow has been treated in recent years by Gronchi (1986Gronchi ( , 1987, Peccati (1987Peccati ( , 1991Peccati ( , 1992, Stewart (1991), Pressacco and Stucchi (1997). After showing that the Economic Value Added introduced by Stewart bears a strong resemblance to (and in some conditions coincides with) the periodic Net Present (or Final) Value in Peccati's model and that Pressacco-Stucchi's model can be seen as a formal generalization of Stewart's model, this paper proposes a different decomposition model introducing the Systemic Value Added, which lends itself to a disaggregation in periodic shares whose uncompounded sum coincides with Peccati's and Pressacco-Stucchi's Net Final Value. The model proposed offers the opportunity to dwell on the notion of residual income, showing that the interpretation given by the three previous models fails to explain the correct evolution of the investor's financial system. The evaluation process is then reshaped by introducing the concept of shadow project, by means of which Peccati's and Stewart's model can be retrieved. Pressacco-Stucchi's model can also be retrieved and generalized and some of its assumptions are relaxed. The formal results in the last section provide sufficient and necessary conditions for integrating all models in the systemic framework here adopted. Finally, some hints shows that the results Pressacco and Stucchi obtain can be proved by using the systemic approach here suggested.

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“…The economic and managerial literature has thoroughly investigated the IRR shortcomings and a huge amount of contributions in the past eighty years have been devoted to searching for corrective procedures capable of healing its flaws (e.g. Boulding 1935, 1936b, Samuelson 1946Lorie and Savage 1955;Solomon 1956;Hirshleifer 1958;Pitchford and Hagger 1958;Bailey 1959;Karmel 1959;Soper 1959;Wright 1959;Kaplan 1965Kaplan , 1967Jean 1968;Arrow and Levhari 1969;Adler 1970;Ramsey 1970;Norstrøm 1967Norstrøm , 1972Flemming and Wright 1971;Fairley and Jacoby 1975;Aucamp and Eckardt 1976;Bernhard 1967Bernhard , 1977Bernhard , 1979Bernhard , 1980De Faro 1978;Herbst 1978;Ross, Spatt and Dybvig 1980;Dorfman 1981;Cannaday, Colwell and Paley 1986;Gronchi 1986;Hajdasinski 1987Hajdasinski , 2004Promislow and Spring 1996;Tang and Tang 2003;Rocabert, Tarrío and Pérez 2005;Zhang, 2005;Kierulff 2008;Simerská 2008).…”

Section: Introductionmentioning

confidence: 99%

Average Internal Rate of Return and Investment Decisions: A New Perspective

Magni

2010

The Engineering Economist

131

104

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The internal rate of return (IRR) is often used by managers and practitioners for investment decisions. Unfortunately, it has serious flaws: (i) multiple real-valued IRRs may arise, (ii) complex-valued IRRs may arise, (iii) the IRR is, in general, incompatible with the net present value (NPV) in accept/reject decisions (iv) the IRR ranking is, in general, different from the NPV ranking, (v) the IRR criterion is not applicable with variable costs of capital. The efforts of economists and management scientists in providing a reliable project rate of return have generated over the decades an immense bulk of contributions aiming to solve these shortcomings. This paper offers a complete solution to this long-standing issue by changing the usual perspective: the IRR equation is dismissed and the evaluator is allowed to describe the project as an investment or a borrowing at his discretion. This permits to show that any arithmetic mean of the one-period return rates implicit in a project reliably informs about a project's profitability and correctly ranks competing projects. With such a measure, which we name "Average Internal Rate of Return", complex-valued numbers disappear and all the above mentioned problems are wiped out. The economic meaning is compelling: it is the project return rate implicitly determined by the market. The traditional IRR notion may be found back as a particular case.

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On Investment Criteria Based on the Internal Rate of Return

Cited by 31 publications

References 4 publications

Behind the black box: a survey of real-world investment appraisal approaches

Behind the black box: a survey of real-world investment appraisal approaches

Systemic Value Added, Residual Income and Decomposition of a Cash Flow Stream

Average Internal Rate of Return and Investment Decisions: A New Perspective

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