THE DECISION PROCEDURE FOR PROFITABILITY OF INVESTMENT PROJECTS USING THE INTERNAL RATE OF RETURN OF SINGLE-PERIOD PROJECTS

概要

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The internal rate of return (IRR) criterion is often used to evaluate profitability of investment projects. In this paper, we focus on a single-period project which consists of two types of cash flows; an investment at one period and a return at a succeeding period, and a financing at one period and a repayment at a succeeding period. We decompose the given investment project into a series of the singleperiod projects. From the viewpoint of the single-period project, we point out the applicability issue of the IRR criterion, namely the IRR criterion cannot be applied in which a project is composed of both investment type and financing type. Investigating the properties of a series of the single-period projects, we resolve the applicability issue of the IRR criterion and propose the decision procedure for profitability judgment toward any type of investment project based on the comparison between the IRR and the capital cost. We develop a new algorithm to obtain the value of the project investment rate (PIR) for the given project, which is a function of the capital cost, only using the standard IRR computing routine. This outcome is a theoretical breakthrough to widen the utilization of IRR in practical applications.