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Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?

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  • Vicente Alcaraz Carrillo De Albornoz

    (Escuela Técnica Superior de Ingenieros de Caminos, Universidad Politécnica de Madrid, Madrid 28040, Spain)

  • Antonio Lara Galera

    (Escuela Técnica Superior de Ingenieros de Caminos, Universidad Politécnica de Madrid, Madrid 28040, Spain)

  • Juan Molina Millán

    (Escuela Técnica Superior de Ingenieros de Caminos, Universidad Politécnica de Madrid, Madrid 28040, Spain)

Abstract

Public Private Partnerships (PPP) are viewed by the private sector as investment projects. An investment criterion, such as the internal rate of return (IRR), widely used by practitioners, is thus necessary in order to determine if the opportunity is sustainable from an economic point of view and worth pursuing. However, a cash flow may have multiple IRRs—is it appropriate in the context of PPPs to use this criterion? This paper provides a clear proposition to determine the potential number of real positive IRRs a cash flow may have, depending on the number of sign variations and the value of the net present value (NPV) calculated with a discount rate equal to 0 ( NPV ( r = 0)). This proposition can sometimes be used when other tests (such as Norstrom’s Criterion) are inconclusive to determine if a cash flow has a single real positive IRR. The proposition is generally met by the typical cash flow of a PPP project, validating the use of IRR as an investment criterion.

Suggested Citation

  • Vicente Alcaraz Carrillo De Albornoz & Antonio Lara Galera & Juan Molina Millán, 2018. "Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?," Sustainability, MDPI, vol. 10(12), pages 1-15, November.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:12:p:4371-:d:185042
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    References listed on IDEAS

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