Remarks on the economic criterion – the internal rate of return.

Carmen Simerska

The internal rate of return (IRR) is used as an important measure
for investment projects and financial securities described by a
sequence of cash flows over time. When used appropriately, it can
be a valuable aid in project acceptance or selection. From
mathematical point of view the problem is to find the roots of an
equation  f(r)=0. We are interested in the existence, uniqueness
and/or multiplicity of the IRR solutions. The IRR can be
unambiguously used in decision making if it is unique and simple.
Additional IRRs can occur  e.g. when changes in the signs of the
net sums or large changes in the relative magnitude occur in the
cash flows. In case of multiple IRR, any numerical method can run
into difficulties. A strategy is proposed how the economist
(financial manager) should deal with the project when special
software tools (symbolic programs), which can provide all existing
roots, are not available.