Economic Internal Rate of Return (EIRR)

Question 1

What is the Economic Internal Rate of Return (EIRR)?

Answer 1

• EIRR: Measures the financial performance variation of an investment, considering both direct and indirect economic effects.

Question 2

How does EIRR differ from Financial Internal Rate of Return (FIRR)?

Answer 2

• EIRR vs. FIRR: EIRR includes externalities and broader economic impacts, while FIRR focuses on economic efficiency and direct financial returns.

Question 3

What are the possible problems in the use of EIRR?

Answer 3

• It may not be easy to identify externalities related to a project.
• Once identified, it might be difficult to attach a value to a given externality.
• Using the FIRR, a project is acceptable if the FIRR is greater than the company’s cost of capital. However, there is no consensus on arriving at an acceptable rate of return for projects that include externalities.