Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR Report as inadecuate




Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR - Download this document for free, or read online. Document in PDF available to download.

Abstract

The internal rate of return IRR is widely used in Private Finance Initiative PFI schemes in the UK for measuring performance. However, it is well-known that the IRR may be a misleading indicator of economic profitability. Treasury Guidance 2004 recognises that the the IRR should not be used and net present value NPV should be calculated instead, unless the cash flow pattern is even. The distortion generated by the IRR can be quantified by the notion of scheduling effect, introduced in Cuthbert and Cuthbert 2012. We combine this notion with the notion of average IRR AIRR, introduced in Magni 2010, 2013 and show that a positive scheduling effect arises if the AIRR, relative to a flat payment stream, exceeds the project’s IRR. The scheduling component can be measured in two separate ways, in terms of specific AIRRs, one of which enables the scheduling component to be decomposed into relative capital and relative rate components. We also highlight the role of average capital, whose quotation in the market, in association with IRRs or AIRRs, would deepen the economic analysis of the project.



Item Type: MPRA Paper -

Original Title: Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR-

Language: English-

Keywords: PFI, AIRR, profitability index, scheduling effect, internal rate of return.-

Subjects: G - Financial Economics > G0 - General > G00 - GeneralG - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment DecisionsG - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest RatesG - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; CapacityM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2 - Business EconomicsM - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M40 - General-





Author: Cuthbert, James R.

Source: https://mpra.ub.uni-muenchen.de/72857/







Related documents