Magni, Carlo Alberto (2016): Capital depreciation and the underdetermination of rate of return: A unifying perspective. Published in: Journal of Mathematical Economics , Vol. 67, (December 2016): pp. 5479.

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Abstract
This paper shows that the notion of rate of return is best understood through the lens of the averageinternalrateofreturn (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rateofreturn notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project’s cashflow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project’s capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purposespecific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.
Item Type:  MPRA Paper 

Original Title:  Capital depreciation and the underdetermination of rate of return: A unifying perspective 
Language:  English 
Keywords:  Investment decision, project appraisal, rate of return, depreciation, capital, net present value, AIRR, mean. 
Subjects:  C  Mathematical and Quantitative Methods > C0  General G  Financial Economics > G0  General G  Financial Economics > G1  General Financial Markets G  Financial Economics > G1  General Financial Markets > G11  Portfolio Choice ; Investment Decisions G  Financial Economics > G2  Financial Institutions and Services > G22  Insurance ; Insurance Companies ; Actuarial Studies G  Financial Economics > G3  Corporate Finance and Governance G  Financial Economics > G3  Corporate Finance and Governance > G31  Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity G  Financial Economics > G3  Corporate Finance and Governance > G32  Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill G  Financial Economics > G3  Corporate Finance and Governance > G35  Payout Policy M  Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M2  Business Economics M  Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4  Accounting and Auditing > M41  Accounting N  Economic History > N0  General 
Item ID:  77401 
Depositing User:  Carlo Alberto Magni 
Date Deposited:  25 Mar 2017 09:07 
Last Modified:  25 Mar 2017 09:08 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/77401 