IDEAS home Printed from https://ideas.repec.org/a/inm/ormnsc/v21y1975i12p1428-1437.html
   My bibliography  Save this article

Investment Analysis Using the Probability Distribution of the Internal Rate of Return

Author

Listed:
  • William Fairley

    (Harvard University)

  • Henry D. Jacoby

    (Massachusetts Institute of Technology)

Abstract

The probability distribution of the internal rate of return of an investment is derived under conditions where uncertainty in costs and returns can be described by a multi-variate normal distribution. The paper sketches the derivation of the exact probability distribution for the rate of return and gives the normal approximation to this distribution when variances of period costs and returns are small. A number of typical normal probability models are discussed in order to demonstrate the flexibility of the approach. An extended application of the analysis is presented using a World Bank appraisal of a hydroelectric power investment in Argentina.

Suggested Citation

  • William Fairley & Henry D. Jacoby, 1975. "Investment Analysis Using the Probability Distribution of the Internal Rate of Return," Management Science, INFORMS, vol. 21(12), pages 1428-1437, August.
    • Handle: RePEc:inm:ormnsc:v:21:y:1975:i:12:p:1428-1437
    DOI: 10.1287/mnsc.21.12.1428
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/mnsc.21.12.1428
    Download Restriction: no
    File URL: https://libkey.io/10.1287/mnsc.21.12.1428?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Treadwell, Rhonda & McKelvie, Lisa & Maguire, Greg B., 1991. "Profitability of selected aquacultural species," Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) Archive 316160, Australian Government, Australian Bureau of Agricultural and Resource Economics and Sciences.
    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. Gordon Hazen, 2009. "An Extension of the Internal Rate of Return to Stochastic Cash Flows," Management Science, INFORMS, vol. 55(6), pages 1030-1034, June.
    4. Anderson, J.R., 1989. "Forecasting, uncertainty, and public project appraisal," Policy Research Working Paper Series 154, The World Bank.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:21:y:1975:i:12:p:1428-1437. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.