Abstract
This article presents a practical approach for computing the internal rate of return (IRR) of stochastic cash flows. The mean and variance of the distribution of the IRR are derived by a second-moment approach using the means, variances, and correlations of the costs and returns in a cash layout. Programmed as an add-in function, the second-moment algorithm was applied to three examples in the literature and the accuracy of the second-moment method was compared with more sophisticated, computationally intensive methods. The comparison indicates that the second-moment approach can serve as a quick and viable tool for probabilistic IRR analysis.
Original language | English (US) |
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Pages (from-to) | 1-19 |
Number of pages | 19 |
Journal | Engineering Economist |
Volume | 57 |
Issue number | 1 |
DOIs | |
State | Published - Jan 1 2012 |
All Science Journal Classification (ASJC) codes
- General Engineering
- Education
- Economics and Econometrics