Abstract
Abstract Results of a recent survey of over 100 exploration, production, and transmission companies operating in the Rocky Mountain Region indicate that the internal rate of return (IRR) is extremely popular as an economic evaluation criterion. However, there still remains, in the views of many authors and evaluators, a question concerning the validity of the IRR calculation. The validity question involves the calculation procedure and whether a rate of reinvestment of incomes is implied or not. Some feel that inherent in the calculation procedure is a reinvestment of incomes at the computed IRR, while others argue that there is no reinvestment implied and that it doesn't matter what is done with the incomes. Because of the reinvestment question and other complications of the IRR calculation, some individuals have suggested that other evaluation criteria be used. This paper contains two parts. The first part presents a review of a few of the evaluation criteria used in the industry and the results of a recent survey concerning those criteria. The second part of the paper will address the reinvestment question and attempt to prove that the IRR calculation procedure does indeed imply reinvestment of incomes at the IRR.
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