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Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes

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  • Cuthbert, J.R.
  • Cuthbert, M.

Abstract

The Internal Rate of Return (IRR) is a commonly used indicator of the performance of Private Finance Initiative (PFI), schemes in the UK. Treasury guidance recognises, however, that IRR is potentially misleading, unless the relevant payment streams are of a flat, annuity, type. This paper uses data on a number of actual PFI schemes to examine whether the payment streams involved are sufficiently flat for IRR to be a reliable indicator. There is clear evidence that the assumption of flat payment profiles in PFI schemes is violated. As a result, quoting IRR alone in the PFI context is liable to understate both the true opportunity cost of PFI finance to the public sector, and the potential scale of private sector profit.

Suggested Citation

  • Cuthbert, J.R. & Cuthbert, M., 2012. "Why IRR is an inadequate indicator of costs and returns in relation to PFI schemes," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 23(6), pages 420-433.
    • Handle: RePEc:eee:crpeac:v:23:y:2012:i:6:p:420-433
    DOI: 10.1016/j.cpa.2012.05.001
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    References listed on IDEAS

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    1. Cuthbert, James R. & Magni, Carlo Alberto, 2016. "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR," International Journal of Production Economics, Elsevier, vol. 179(C), pages 130-140.
    2. Jahanifar, Komeil & Amirnejad, Hamid & Azadi, Hossein & Adenle, Ademola A. & Scheffran, Jürgen, 2019. "Economic analysis of land use changes in forests and rangelands: Developing conservation strategies," Land Use Policy, Elsevier, vol. 88(C).
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    5. Carlo Alberto Magni & Ken V. Peasnell, 2015. "The Term Structure of Capital Values:An accounting-based framework for measuring economic profitability," Department of Economics 0060, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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