Incorporating the Concept of Internal Rate of Return in Linear and Integer Programming Models
The use of an internal rate of return (IRR) measure is cammon in financial problems. Over the past decade the measure has been enjoying an increased usage in the new municipal debt issue market. Nauss (Management Science, July 1986) developed a procedure to minimize the IRR for competitive bids for new issues of municipal debt. While this problem was generally viewed as being a nonlinear integer program, it was shown that the problem could be linearized so that an integer linear program resulted. The linearization is possible because there is only one change in the sign of the cash flows over time. This assures that only one real root for the IRR exists. A special purpose branch and bound algorithm was developed to solve the problem in a matter of seconds so that it could be used in actual applications.