The rate of return is often used as a criterion for making investment decisions. This rate is commonly defined as a discount rate which is such that the discounted capital and income flows are equal. For some investment projects, more than one such discount rate can be found.

This situation arises in projects requiring capital investments at different times in the life of the project; usually two rates of return exist for acceleration projects in the development of oil fields.

It is shown that the rate of return will be unique if the cash flow of a venture satisfies certain conditions. Then by a modification of the definition of rate of return a new concept called "internal rate of return" is introduced. This concept is of economic significance, being an extension of the common definition of rate of return, and provides a unique evaluation of any investment project.


Le "rate of return" est employé souvent comme critère pour décider d'un investissement. Ce taux est ordinairement défini comme le taux de l'interêt continu tel que le capital escompté à ce taux est égal à la somme des rentrées escomptées à ce même taux. Selon cette définition, on peut trouver plus d'un "rate of return" pour certains projets d'investissement. C'est le cas des projets qui demandent l'investissement de capitanx à des moments différents de la vie du projet; deux "rates of return" existent, en général, pour des projets d'exploitation accélérée d'un gisement d'huile ou de gaz.

On montre qu'il n'existe qu'un seul "rate of return" si les rentrées d'argent d'une entreprise satisfont à un nombre de conditions. En modifiant la définition du "rate of return," un nouveau concept, appelé "internal rate of return" est proposé. Ce concept, étant une généralisation de la définition habituelle du "rate of return," est important du point de vue économique et il permet l'évaluation unique d'un projet quelconque d'investissement.

I. Introduction

The problem of evaluating investment projects is a wide-spread one in industry, and many methods of attack to the problem have been proposed. Such proposals consist essentially in the computation of one or more numbers intended to describe the profitability of the project. One such criterion, which is the subject of the present paper, is the rate of return, also called the present value method, true rate of return, the discounted-cash-flow method, and other names. This technique is by no means a new one, having been used in the field of banking in times of antiquity. References to the modern literature on this subject may be found in [i], and a recent discussion as applied to the oil industry is given in [2].

We shall present in this paper a discussion of some of the anomalous effects that appear when the common definition of

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