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The Comprehensive Method of Solving the Multiple Internal Rate of Return Problem

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  • Ivo Speranda
  • Zdenko Speranda

Abstract

The paper discusses the problem of the so called multiple internal rate of return with special emphasis of the author on the present attempts to solve the problem. Considering that none of the current numerous efforts to solve the problem of the multiple internal rate of return have provided a comprehensive solution to it, the author suggests a new approach and solution. The proposed and completely new integral method of calculating IRR and its redefining (as a rate that does not make the net present value equal to zero) enables each individual case, regardless of the character of the cash flow, to calculate the central rate and the corresponding central net present value. Central discount rate (C) represents IRR defined as the average rate of compounding of the investment with precondition of reinvestment. Besides, this method avoids the problem of the multiple IRR, while total (all) value of the area below the curve of the interdependent discount rates and net present value is more comprehensive and more real representative of the value of the NPV (Net Present Value) because the calculation takes into account all discount rates in the observed range. Finally, the method solves the problem of the appearance of the so called nonexistent IRR.

Suggested Citation

  • Ivo Speranda & Zdenko Speranda, 2019. "The Comprehensive Method of Solving the Multiple Internal Rate of Return Problem," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 15(1), pages 73-86.
    • Handle: RePEc:mje:mjejnl:v:15:y:2019:i:1:p73-86
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    References listed on IDEAS

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    1. James H. Lorie & Leonard J. Savage, 1955. "Three Problems in Rationing Capital," The Journal of Business, University of Chicago Press, vol. 28, pages 229-229.
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