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A Simulation‐Based Investigation of Errors in Accounting‐Based Surrogates for Internal Rate of Return

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  • Steven R. Fritsche
  • Michael T. Dugan

Abstract

Accounting‐based measures of a firm's ex post performance represent accessible, albeit imperfect, surrogates for its internal rate of return (IRR). Using a cross‐sectional data set obtained via computer simulation, this study calculated the error with which the accounting rate of return (ARR) and conditional estimate of internal rate of return (CIRR) estimate IRR. The study compared the error with which both surrogates measure IRR, as well as the ability of growth in unit demand (gD), inventory cost flow assumption (INV) and depreciation method (DEP) to explain the measurement error in both surrogates.

Suggested Citation

  • Steven R. Fritsche & Michael T. Dugan, 1997. "A Simulation‐Based Investigation of Errors in Accounting‐Based Surrogates for Internal Rate of Return," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 781-802, July.
    • Handle: RePEc:bla:jbfnac:v:24:y:1997:i:6:p:781-802
    DOI: 10.1111/1468-5957.00133
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    Cited by:

    1. Julian Wells, Julian, 2007. "The rate of profit as a random variable," MPRA Paper 98235, University Library of Munich, Germany.

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