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Interval and fuzzy Average Internal Rate of Return for investment appraisal

Author

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  • Maria Letizia Guerra

    ()

  • Carlo Alberto Magni

    ()

  • Luciano Stefanini

    ()

Abstract

In investment appraisal, uncertainty can be managed through intervals or fuzzy numbers because the arithmetical properties and the extension principle are well established and can be successfully applied in a rigorous way. We apply interval and fuzzy numbers to the Average Internal Rate of Return (AIRR), recently introduced for overcoming the problems of the traditional Internal Rate of Return (IRR). In the setting of interval and fuzzy arithmetic, we establish relations between the interim capitals invested, the profits and the cash flows, which are the ingredients of the AIRR, and shed lights on the different ways uncertainty propagates depending on which variable is known and which one is derived. The relations between fuzzy AIRR and fuzzy Net Present Value are also investigated.

Suggested Citation

  • Maria Letizia Guerra & Carlo Alberto Magni & Luciano Stefanini, 2012. "Interval and fuzzy Average Internal Rate of Return for investment appraisal," PROYECCIONES FINANCIERAS Y VALORACION 009641, MASTER CONSULTORES.
  • Handle: RePEc:col:000463:009641
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    File URL: http://ssrn.com/abstract=2080250
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    References listed on IDEAS

    as
    1. Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
    2. Carlo Magni, 2005. "On Decomposing Net Final Values: Eva, Sva and Shadow Project," Theory and Decision, Springer, vol. 59(1), pages 51-95, August.
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    More about this item

    Keywords

    investment; uncertainty; fuzzy; rate of return; AIRR net present value;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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