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ABSTRACT
This article shows that the internal rate of return (IRR) of a project's expected cash flow stream is a weighted average of the IRRs offered by the project's (many) possible future outcomes, where the weights are calculated using the outcome probabilities and invested capital balances. Because the invested capital associated with a particular realization is a function of the Macaulay duration of the cash flows in that outcome, the weights depend on the outcome probabilities and the effective length of each cash flow stream.
Acknowledgment
The author thanks an anonymous referee and the associate editor for their constructive suggestions for revising the paper.
Notes on contributor
Morris G. Danielson is an associate professor of finance at St. Joseph's University, Philadelphia, Pennsylvania. He received his Ph.D. in finance from the University of Washington. Dr. Danielson's research covers topics in the following areas: valuation ratios and investor expectations, accounting and economic measures of profitability, corporate governance, and small business finance.
Additional information
Notes on contributors
Morris G. Danielson
Morris G. Danielson is an associate professor of finance at St. Joseph's University, Philadelphia, Pennsylvania. He received his Ph.D. in finance from the University of Washington. Dr. Danielson's research covers topics in the following areas: valuation ratios and investor expectations, accounting and economic measures of profitability, corporate governance, and small business finance.