Abstract The article examines the limitation of the application of the internal rate of return (IRR) model in the multi-asset problem. Virtually all applications of the IRR have been structured in the context of a single-asset situation, thereby avoiding the "multi-asset problem" which has two dimensions. The application of the IRR in a single-asset situation requires information about the asset's cost and future cash flows. This limitation of the IRR in the multi-asset situation is the subject of this paper. The first section establishes the relationship between the IRR and estimation theory which offers a direct way to study the problem. Thus, when cash flows are arbitrarily assigned to completely joint assets and the IRR is used to determine the amortization scheme for individual assets, the data for the firm cannot be interpreted in terms of the IRR. Consequently, the justification for the use of the IRR in the single-asset situation does not apply to the multi-asset situation, even in the case of separable assets. The conclusion, therefore, is that the IRR is essentially a firm model, not a single-asset model.
Brief et al. (1973) studied this question.