Postulates for the internal rate of return of an investment project

Abstract The internal rate of return of a finite sequence of cash flows is studied in terms of four natural postulates: (1) continuity of the rate with respect to the cash flows; (2) monotonicity, i.e. the rate increases in case any cash flow increases; (3) normalization, or agreement with the usual rate of return in the case of loan contracts; (4) scale invariance. Measure-theoretic models are constructed that satisfy the postulates. Classical rate of return functions are reconstructed within this framework and logical relationships among all these functions are established.