INFLATION,MAINTENANCE OF CAPITAL,AND THE IRR MODEL: AN APPRAISAL AND ALTERNATIVE

Capital budgeting under inflationary conditions presents some additional implementation problems when computing the internal rate of return. This paper reviews an earlier proposal made in this journal and concludes that it has some technical deficiencies. Further, it does not have the flexibility needed to be congruent with a wide variety of concepts of capital maintenance and asset evaluation. An algorithm is developed that will permit the user to make a variety of assumptions and then solve for the IRR that is consistent with those assumptions.