Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions
International Journal of Economics, Finance and Management Sciences
Volume 7, Issue 3, June 2019, Pages: 88-94
Received: Feb. 13, 2019; Accepted: Jun. 3, 2019; Published: Aug. 5, 2019
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Author
Alfonso Rodríguez, Department of Economic, Financial and Actuarial Mathematics, Barcelona University, Barcelona, Spain
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Abstract
This investigation conceptually shows, also mathematically and empirically, the unacceptable errors of IRR for the evaluation of the financial profitability in complex investments. The solutions of the IRR are still generally unknown because they are solutions of a polynomial equation without normal mathematical resolution. Through a particular financial-vectoral model, this work has managed to solve it, knowing all its possible solutions, which confirm the announced errors. The model also allows us to return to the correct definition of financial profitability, necessarily obviated by the IRR for the lack of a single investment term for all the partial investments existing in the complex investment. Through a Medium Financial Term (MFT), financially equivalent to effective diverse existing investment terms, the work has made possible to return to the strict financial definition of investment profitability through the Profitability Financial Rate (PFR) substitution of the IRR. Through a simulation with five easy complex investments, the work empirically shows the solutions achieved which prove, also empirically, the errors of the IRR. Finally, the work shows other serious anomalies of the IRR in the evaluation of complex investments and in the selection of the optimal investment, derived from its hidden calculus type (the same IRR). Also, it evidences its ignorance on a possible investor degeneration, with serious consequences in the economic meaning of the result.
Keywords
Investment, Financing, Investment Mathematics, Financing Mathematics, Financial Profitability, Implicit Interest, IRR, PFR, Investor Degeneration
To cite this article
Alfonso Rodríguez, Profitability in Complex Investments: Errors of IRR and Other Anomalies, Their Solutions, International Journal of Economics, Finance and Management Sciences. Vol. 7, No. 3, 2019, pp. 88-94. doi: 10.11648/j.ijefm.20190703.12
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Copyright © 2019 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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