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Are Economic Profit and the Internal Rate of Return Merely Accounting Measures?

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  • Melvin L. Roush
  • Mohammed S. Khaled
  • Stephen P. Keef

Abstract

This paper explores the proposition that economic profit and the internal rate of return are merely accounting concepts. They share a number of common aspects. These include an allocation of capital that is unrelated to market forces and a treatment in the literature that focuses on the mathematics rather than the economics. We show that the two measures have limited, if any, economic content. Therefore we conclude that they are devoid of compelling theoretical interest in the domain of wealth maximization.

Suggested Citation

  • Melvin L. Roush & Mohammed S. Khaled & Stephen P. Keef, 2011. "Are Economic Profit and the Internal Rate of Return Merely Accounting Measures?," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 1(3), pages 120-120.
    • Handle: RePEc:ers:ijfirm:v:1:y:2011:i:3:p:120
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    References listed on IDEAS

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    1. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
    2. Carlo Alberto Magni, 2010. "Average Internal Rate of Return and investment decisions: A new perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    3. Bennett Stewart, 2009. "EVA Momentum: The One Ratio That Tells the Whole Story," Journal of Applied Corporate Finance, Morgan Stanley, vol. 21(2), pages 74-86, March.
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