ASTM E1057-06e1

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Designation:E1057–06
Standard Practice for
Measuring Internal Rate of Return and Adjusted Internal
Rate of Return for Investments in Buildings and Building
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Systems
This standard is issued under the fixed designation E1057; the number immediately following the designation indicates the year of
original adoption or, in the case of revision, the year of last revision.Anumber in parentheses indicates the year of last reapproval.A
superscript epsilon (´) indicates an editorial change since the last revision or reapproval.
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´ NOTE—Footnotes updated editorially in August 2007.
INTRODUCTION
The internal rate-of-return (IRR) and adjusted internal rate-of-return (AIRR) methods are members
of a family of economic evaluation methods that provide measures of economic performance of an
investmentovertime.Othermethodsinthisfamilyofevaluationmethodsarelife-cyclecostanalysis,
net benefits and net savings analysis, benefit-to-cost and savings-to-investment ratio analysis, and
payback analysis.
The IRR andAIRR methods are the topic of a single standard practice because they both measure
economic performance as a compound yield on investment.The IRR is the compound rate of interest
that,whenappliedasadiscountratetoaproject’sstreamofdollarbenefitsandcosts,willequatethem.
The AIRR is the overall yield taking into account earnings on receipts reinvested to the end of the
study period.The IRR orAIRR is compared against the investor’s minimum acceptable rate of return
(MARR), and the investment is considered economically attractive if the calculated yield exceeds the
MARR. If an investment entails an initial outlay and a single receipt at the end of the study period,
there is no difference between the IRR and the AIRR. But if cash flows occur over multiple time
periods, the two will normally be different. This arises because theAIRR includes in its measure the
return on reinvestment of receipts, whereas the IRR does not.
The AIRR is recommended for most applications in which a measure of yield is desired. Caution
is recommended in applying either measure, however, because problems arise under certain
conditions.
1. Scope E833 Terminology of Building Economics
E917 Practice for Measuring Life-Cycle Costs of Buildings
1.1 This practice covers a procedure for calculating and
and Building Systems
interpreting the internal rate of return (IRR) and adjusted
E964 Practice for Measuring Benefit-to-Cost and Savings-
internal rate of return (AIRR) measures in the evaluation of
to-Investment Ratios for Buildings and Building Systems
building designs, systems, and equipment.
E1074 PracticeforMeasuringNetBenefitsandNetSavings
2. Referenced Documents
for Investments in Buildings and Building Systems
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E1121 Practice for Measuring Payback for Investments in
2.1 ASTM Standards:
Buildings and Building Systems
E631 Terminology of Building Constructions
E1185 Guide for Selecting Economic Methods for Evaluat-
ing Investments in Buildings and Building Systems
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This practice is under the jurisdiction of ASTM Committee E06 on Perfor-
E1369 Guide for Selecting Techniques for Treating Uncer-
mance of Buildings and is the direct responsibility of Subcommittee E06.81 on
tainty and Risk in the Economic Evaluation of Buildings
Building Economics.
and Building Systems
Current edition approved April 1, 2006. Published April 2006. Originally
approved in 1985. Last previous edition approved in 2004 as E1057–04. DOI:
E1765 Practice for Applying Analytical Hierarchy Process
10.1520/E1057-06E01.
(AHP) to Multiattribute Decision Analysis of Investments
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For referenced ASTM standards, visit the ASTM website, www.astm.org, or
Related to Buildings and Building Systems
contact ASTM Customer Service at service@astm.org. For Annual Book of ASTM
Standards volume information, refer to the standard’s Document Summary page on
the ASTM website.
Copyright © ASTM International, 100 Barr Harbor Drive, PO Box C700, West Conshohocken, PA 19428-2959, United States.
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E1057–06
E1946 Practice for Measuring Cost Risk of Buildings and 5.1.1 The IRR method is appropriate in most cases for
Building Systems evaluating whether a given building or building system will be
E2204 Guide for Summarizing the Economic Impacts of economically efficient, that is, whether its time-adjusted ben-
Building-Related Projects efits will exceed its time-adjusted costs over the period of
2.2 ASTM Adjuncts: concerntothedecisionmaker.However,ithasdeficienciesthat
Discount Factor Tables, Adjunct to Practices E917, E964, limit its usefulness in choosing among projects competing for
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E1057, E1074, and E1121 a limited budget.
5.2 The AIRR method is a measure of the overall rate of
3. Terminology
return that an investor can expect from an investment over a
3.1 Definitions—For definitions of terms use
...