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The Internal Rate of Return Approach and the AIRR Paradigm: A Refutation and a Corroboration

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  • Carlo Magni

Abstract

This article 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 18 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.

Suggested Citation

  • Carlo Magni, 2013. "The Internal Rate of Return Approach and the AIRR Paradigm: A Refutation and a Corroboration," The Engineering Economist, Taylor & Francis Journals, vol. 58(2), pages 73-111.
    • Handle: RePEc:taf:uteexx:v:58:y:2013:i:2:p:73-111
    DOI: 10.1080/0013791X.2012.745916
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G00 - Financial Economics - - General - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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