A second moment approach to probabilistic IRR using taylor series

Byung Cheol Kim, Kenneth F. Reinschmidt

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

This article presents a practical approach for computing the internal rate of return (IRR) of stochastic cash flows. The mean and variance of the distribution of the IRR are derived by a second-moment approach using the means, variances, and correlations of the costs and returns in a cash layout. Programmed as an add-in function, the second-moment algorithm was applied to three examples in the literature and the accuracy of the second-moment method was compared with more sophisticated, computationally intensive methods. The comparison indicates that the second-moment approach can serve as a quick and viable tool for probabilistic IRR analysis.

Original languageEnglish (US)
Pages (from-to)1-19
Number of pages19
JournalEngineering Economist
Volume57
Issue number1
DOIs
StatePublished - Jan 1 2012

All Science Journal Classification (ASJC) codes

  • Education
  • Economics and Econometrics
  • Engineering(all)

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