The Meaning of Internal Rates of Return

Abstract

Nearly one hundred years after Irving Fisher's persuasive argument that net present value is the fundamental criterion for appraising investment projects, businessmen and bankers continue to consider the internal rate of return. Business practice is justified in some circumstances. It has long been recognized that a firm will grow asymptotically at a rate equal to the largest real positive root of an individual project's rate of return equation if the net cash flows are continually reinvested in projects of the same type. That same root also controls the firm's asymptotic growth rate if any fixed proportion of the cash flows is reinvested. The other roots of the equation are important also, since the stability of the firm's growth path depends on them. 1981 The American Finance Association