Internal Rate of Return (IRR): A New Proposed Approach

Date

2017

Journal Title

Journal ISSN

Volume Title

Publisher

Springer Science and Business Media B.V.

Abstract

This study tries to develop a new internal rate of return (IRR) approach assuming constant and positive cash flows. The traditional IRR method is implicitly based on trial and error that needs two initial guesses and slowly converges to the solution. The development so far was based on Newton–Raphson methods that reduce the two guesses to only one guess with quadratic convergence. However, this development has many limitations such as divergence at inflection points and pitfalls like division by zero. The progress of our study so far is to eliminate the initial guess with assumption of equal series of positive cash flows. Further, the expected finding of the new approach will assist practitioners and academics to compute the IRR accurately as the rate of return on the declining balance of the investment, analogous to the YTM on a premium bond and the contract rate on a fully amortized loan. © 2017, Springer International Publishing Switzerland.

Description

Keywords

Bisection, IRR, Newton–Raphson

Citation

Mujahed, M.M. & Elshareif, E.E. (2017). Internal Rate of Return (IRR): A New Proposed Approach. In R. Benlamri & M. Sparer (Eds.) Leadership, Innovation and Entrepreneurship as Driving Forces of the Global Economy. Springer Proceedings in Business and Economics (pp. 761 – 767). Springer, Cham. https://doi.org/10.1007/978-3-319-43434-6_68

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