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Re: [Help-glpk] IRR (Internal Rate of Return) using MathProg


From: Robbie Morrison
Subject: Re: [Help-glpk] IRR (Internal Rate of Return) using MathProg
Date: Sat, 15 Sep 2012 04:45:54 +1200
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Hi Noli

------------------------------------------------------------
To:          "address@hidden" <address@hidden>
Subject:      [Help-glpk] IRR (Internal Rate of Return) using MathProg
From:         Noli Sicad <address@hidden>
Date:         Sat, 15 Sep 2012 01:26:56 +1000
------------------------------------------------------------

> I like to incorporate IRR (Internal Rate of Return) in
> my report (i.e.  Report Section of my LP GLPK/MathProg
> model). I don't how to do this using mathprog
>
> Linux Journal has article in IRR and programs in Java,
> C and Perl. You can download the source here.
> http://www.linuxjournal.com/article/2545
>
> However, I have difficulties deciphering it.
>
> Some discussions on various methods on how to calculate
> IRR.  http://finance.thinkanddone.com/irr.html
>
> My LP model is maximizing Net Present Value
> (i.e. revenues / Cash flow). Here is example of the
> cash flow (below).

I cannot help you with the MathProg code.  But I do use
discounted cash flow calculations.  So here are some
observations:

IRR is not NPV.  You need to get the right formula from
wikipedia.  It seems to me (but I could be badly
mistaken) that NPV is an explicit equation and IRR is
implicit.  NPV takes the discount rate as parameter,
hence no need for numerical methods like
Newton-Raphson.  You just need NPV then?

Once you get your formula working, check it against the
appropriate spreadsheet function.  In my case, I used:
PMT(rate, periods, investment value, future value).
That way you will align with the industry conventions.

You can sometimes break the formulas up into parts for
ease of coding.

You will need to decide how to deal with all the corner
cases: can the interest rate be zero for instance, do
you wish to check, what happens then, and so on ..

One reference that I never used, but looked interesting:

  Ƙdegaard, Bernt Arne.  2007.  Financial numerical
    recipes in C++ -- April 2007.  Software
    documentation.

    http://finance.bi.no/~bernt/gcc_prog
    http://finance.bi.no/~bernt/gcc_prog/recipes/recipes.pdf
    http://finance.bi.no/~bernt/gcc_prog/recipes/finrecipes.tar.gz

Finally, try googling with "GAMS".  This must be a
common enough task for GAMS users.  This one looks
related (but care with the download, the filename
contains comma chars):

  Wu, Jinzhuo, Mark Sperow, and Jingxin Wang.  2010.
    Economic feasibility of a woody biomass-based
    ethanol plant in central Appalachia.  Journal of
    Agricultural and Resource Economics v35 no3
    p522-544.

    http://purl.umn.edu/99118
    
http://ageconsearch.umn.edu/bitstream/99118/2/JARE,Dec2010,%2311F,pp522-544.pdf

HTH, Robbie
---
Robbie Morrison
PhD student -- policy-oriented energy system simulation
Institute for Energy Engineering (IET)
Technical University of Berlin (TU-Berlin), Germany
University email (redirected) : address@hidden
Webmail (preferred)           : address@hidden
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