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The two-stage growth model (Danielson, 1998) empowers analysts to quantify the growth expectations supporting a firm's stock price. This article merges that two-stage growth model with the AIRR model developed by Magni (2010, 2013). The new model simplifies the calculation of the firm's expected competitive advantage period and the expected annual growth rate. The new model can be used to quantify expectations for both dividend and non-dividend paying firms and when the return on new investments or the required return on equity might not be constant in the future. [ABSTRACT FROM AUTHOR]

One of the most attractive indexes to select the best investment decision is internal rate of return (IRR) measure, but it has some significant faults both in practice and theoretically. Multiple attempts have been made to resolve the IRR challenges, but none of them are perfect. This article presents the Modified Simple Average Internal Rate of Return criterion as a profitability index for calculating a unique rate of return for all various types of cash flow streams so that obtained results are consistent with the net present value method in accept/reject decisions. The presented method is simple to compute and is capable of resolving all known IRR defects including when the resulting rate is greater than −1. [ABSTRACT FROM AUTHOR]

In this paper we describe an approach for calculating the rates of return of investments whose timing is uncertain. In the framework of the approach, we calculate the expected value of the rate of return. We extend the deterministic Endpoints and Modified Dietz rate of return models by viewing the investments transaction timings as random variables. Our main working assumption is that the transaction timings are uniformly distributed in a certain time interval. We study a series of new rate of return models that have a wide range of practical applications. Our results generalize some well-known rate of return formulas, including the renowned Modified Dietz formula. The models introduced in this paper provide one-period rates of return compliant with the Global Investment Performance Standards (GIPS) requirements. They can be used for GIPS-compliant calculations. [ABSTRACT FROM AUTHOR]

Research in multiple internal rate of return (MROR) has mainly focused on three areas: uniqueness, conditions where MROR occur, and solutions to MROR. In an attempt to solve for MROR, researchers have assumed that the occurrence of MROR is prevalent and thus a solution is direly needed. This article examines the probability that positive MROR would occur when variation is incorporated into the cash flow and the probability of getting positive MROR when multiple sign-change cash flow is generated. Results show that the probability of positive MROR occurring in multiple sign-change cash flows is relatively low and potentially a rare event. [ABSTRACT FROM PUBLISHER]

This article introduces the generalized net present value (GNPV) method for nonconventional project evaluation. This method generalizes the NPV method by using two discount rates: the finance rate for positive present values and the reinvestment rate for negative present values. As a result, the different rates discount cash flows invested in the project and released by the project. The GNPV method allows us to consider any nonconventional project as an investment or a loan. Therefore, each nonconventional project always has two rates of return; that is, GIRR(p) and GERR(r), depending on the reinvestment and the finance rate, respectively. The GNPV, generalized internal rate of return (GIRR), and generalized external rate of return (GERR) rules for justifying and ranking independent nonconventional projects are proposed. These rules do not contradict each other. A graphical interpretation (“GNPV diagram”) of the decision-making rules is suggested. The GNPV method is applied to the solution of the Lorie-Savage oil pump problem and the rate of return is determined for a project without IRR. [ABSTRACT FROM AUTHOR]

We show how to determine a unique rate, for a particular cash flow stream, that is used only whenever a project demands outside resources to compound the rates of the existing term structure precisely at those times. The net present value of the cash flow stream when discounted with the thus-modified term structure becomes zero. We therefore determine a vector of rates that belongs to the induced space of internal rates of return for that cash flow stream. The rate is applicable under discrete stochastic interest rate representations and provides maximum loan rates that may be contracted only when needed thus keeping a project financially autonomous. (Any investments required may be fully repaid by the project's own cash outflows). [ABSTRACT FROM AUTHOR]

Aggregate development impact fees must be apportioned among developers in a manner commensurate with benefits provided by new infrastructure. We propose a methodology to directly, rather than iteratively, apportion aggregate development impact fees so that all users receive an internal rate of return equal to the municipality's cost of capital. The methodology explicitly recognizes that users may enjoy the benefits of infrastructure for different periods of time. The model provides for proportionate share assessment of impact fees whether infrastructure investment occurs before, during, or after development and is flexible in addressing changes in demand and in the municipality's cost of capital. [ABSTRACT FROM AUTHOR]

The recent notion of average internal rate of return (AIRR; Magni 2010a, The Engineering Economist, 55(2), 150-180) completely solves the long-standing problem of the internal rate of return (IRR). Though the AIRR is a return measure, this article presents a cash-flow measure, namely, the ratio of net cash flow (i.e., cash inflows minus cash outflows) to capital invested, which we call aggregate return on investment (AROI). It is a purely internal measure because, unlike the AIRR, it does not depend on the market rate and is a return measure, because it is a mean of one-period return rates, weighed by the outstanding capitals. The AROI is reliable in both accept/reject decisions and project ranking, in association with an appropriate, economically significant hurdle rate: the comprehensive cost of capital (CCOC), which takes into account not only the interest foregone on the capital actually employed but also the interest foregone on the capital that is given up by the investor. This perspective enables one to decompose the project net present value (NPV) into an excess-rate share and an excess-capital share. The traditional IRR is just a particular case of both AIRR and AROI, but the latter approach has the advantage that the IRR's nature (rate of return versus rate of cost) does not depend on the market rate and is unambiguously determined by the capital invested. [ABSTRACT FROM AUTHOR]

Viewing the future value of a cash flow stream as a polynomial in the compounding factor (being one plus the interest rate), this article uses Ruffini's rule in the synthetic division of a polynomial to provide insight linking several discounted cash flow analysis concepts. We use the polynomial remainder theorem to relate the concepts of divisor, quotient, and remainder to concepts in cash flow analysis-future value, present value, interest rate, account balance, and internal rate(s) of return-establishing a remainder theorem for the future value of a cash flow. Our exposition suggests that future value analysis is perhaps more direct and mathematically more transparent than attention paid to examining present value. This article extends previous work on the resolution of multiple rates of return when the interest rate used in our analysis equals an internal rate of return of the cash flow. [ABSTRACT FROM AUTHOR]

This note proposes a coherent system enabling interpretation and manipulation of rates of interest (or rates of return) including an imaginary component. This may help to shed new light on equations involving complex solutions, especially when valuing investment projects. In addition, a series of real rates can be associated with any complex rate. Each real rate can then be interpreted as a portfolio's expected return. As an example of application, when a project involves the joint production of two outputs whose markets have not the same risk, our approach allows the project's cash flow to be discounted at a single (but complex) rate. [ABSTRACT FROM AUTHOR]

The internal rate of return (IRR) is often used by managers and practitioners for investment decisions. Unfortunately, it has serious flaws: (1) multiple real-valued IRRs may arise; (2) complex-valued IRRs may arise; (3) the IRR is, in general, incompatible with the net present value (NPV) in accept/reject decisions; (4) the IRR ranking is, in general, different from the NPV ranking; (5) the IRR criterion is not applicable with variable costs of capital. The efforts of economists and management scientists in providing a reliable project rate of return have generated over the decades an immense bulk of contributions aiming to solve these shortcomings. This article offers a complete solution to this long-standing unresolved issue by changing the usual perspective: the IRR equation is dismissed and the evaluator is allowed to describe the project as an investment or a borrowing at his discretion. This permits showing that any arithmetic mean of the one-period return rates implicit in a project reliably informs about a project's profitability and correctly ranks competing projects. With such a measure, which we call average internal rate of return, complex-valued numbers disappear and all the above-mentioned problems are wiped out. The economic meaning is compelling: it is the project return rate implicitly determined by the market. The traditional IRR notion may be found as a particular case. [ABSTRACT FROM AUTHOR]

Project balances are shown to be the coefficients resulting from division of the future worth polynomial by a simple monomial and are used in representations of the future worth polynomial and its derivative. Those representations are used to provide elementary proofs for some rate of return analysis results making use of our project balance framework. We develop a convenient method to determine the existence of a root of multiplicity from the derivative of the future worth polynomial using project balances. This article incorporates a useful, unified collection of results that previously have been dispersed throughout the literature that should be of interest to technical economic analysts. [ABSTRACT FROM AUTHOR]

In this article the concept of an integration model of financial analysis methods of investment projects is presented. The described approach concerns the discounted cash flow methods and is focused on the future value growth of an investment. The defined relationships between these methods make it possible to illustrate the main perspectives of efficiency analysis. The aim of this article is to bring many methods of analysis together in a common framework. [ABSTRACT FROM AUTHOR]

Volatility is the one parameter that is added to information utilized in traditional discounted cash flow analysis in order to calculate the value of a real option. There is no single, theoretically justified approach for calculating the volatility coefficient for real options. This article reviews and compares the methods currently available to estimate the volatility parameter to be used in real options analysis. As these techniques often overlook the investment cost risk when estimating project volatility, a new method of computing volatility that utilizes the expected internal rate of return is presented. The methods are compared using two case studies. Furthermore, a definition of “actionable” volatility is offered in order to classify the risky parameters to be used in real options valuation. Most methods overestimate the volatility parameter, because the volatility of the decision is included in the estimate, not the volatility associated with the option, which we term actionable risk. [ABSTRACT FROM AUTHOR]

The following proposes a methodology that utilizes a generalized regression neural network to develop a hybrid option trading system that incorporates both volatility and return forecasting. This study focuses on the S&P 500 stock index as being representative of the market. Two different hybrid systems are discussed. The first hybrid system applies a signal from the volatility forecasting as a primary signal and then uses long and short straddle, strip, and strap strategies to take advantage of the volatility signal. The second hybrid system applies a signal from the return forecasting as a primary signal and then uses long calls and puts and bull and bear spread strategies to take advantage of the forecasting signal. The results show that the hybrid options trading model can improve the overall trading return and can outperform trading models using merely return forecasting or volatility forecasting in isolation. A sensitivity analysis for each trading system is investigated to observe the results for different values of critical option parameters. [ABSTRACT FROM AUTHOR]

This article presents a technique for determining project acceptability and for rank ordering two mutually exclusive projects when multiple internal rates of return are present. This method is consistent with the net present value approach. In focusing on the even or odd parity of the number of real internal rates of return that are greater than the cost of capital, this method is shown to have generality and simplicity. This article also compares the proposed technique with the relevant internal rate of return approach defined in the recent literature. [ABSTRACT FROM AUTHOR]

Scale is a fundamental consideration when evaluating and ranking capital investment projects. Beaves [2, 3], Lin [6], and Shull [7] have noted that the definition of “project scale” is key to the definition of “modified” or “overall” rates of return earned by projects. This article demonstrates that the impact of how project scale is defined extends beyond the calculation of rate of return decision criteria. Given its importance to the capital budgeting process, it is somewhat surprising that project scale has not been clearly and consistently defined. The purpose of this article is to raise awareness of the need for a uniform definition of project scale. Although three potential measures of project scale are compared, this article does not provide a mathematical proof that one of these definitions is correct and the others are not. Nonetheless, a strong argument is made for a particular measure of project scale as well as for the importance of having a single, uniform definition of that concept. [ABSTRACT FROM AUTHOR]

In this article we present a method for determining project acceptability in the presence of multiple internal rates of return. An internal rate of return is an interest rate that equates the present worth of a cash flow stream to zero. When unique, it provides valuable information about the return on the investment and is often viewed as a measure of efficiency. Unfortunately, this analysis is clouded when there are multiple internal rates of return, which can occur when a project is defined by a mixture of positive and negative cash flows. While many methods have been presented in the literature to deal with this problem, we believe ours to be unique in that it does not rely on the computation of another measure of worth, but rather, the identification of the relevant rate of return from the set of internal rates of return. We show that this rate always produces decisions consistent with present worth under the assumption that at least one real internal rate of return exists. In doing so, we provide new definitions of when a project is borrowing from, or loaning to, the firm. These definitions help in understanding the meaning of multiple internal rates of return, which is also discussed. [ABSTRACT FROM AUTHOR]

This paper develops a new measure of cash-flow timing called "return duration." Numerically quite close to Macaulay duration, return duration is a straightforward function of a project's net present value (NPV) and internal rate of return (IRR). When comparing mutually exclusive projects, differences in return duration can explain ranking conflicts between NPV and IRR. The paper also clarifies the conditions under which a manager should consider duration or generalized NPV before making investment decisions when faced with such ranking conflicts. [ABSTRACT FROM AUTHOR]

The study examines the use of divisional cost of capital by Fortune I000 companies. Two hundred and ninety eight firms (29.8 percent) responded to the survey. While the concept of weighted average cost of capital is utilized by 85.2 percent of the respondents, less than 50 percent use divisional cost of capital. By using a single firm cut-off criterion for all projects, there is the potential for intrafirm misallocation of capital since projects initiated by high risk divisions are more likely to be accepted because of high returns. Lower return divisions with less risk may be starved for capital when only a single weighted average cost of capital is used. The author also suggests some normative approaches to solve the problem. [ABSTRACT FROM AUTHOR]

In this paper, we measure economic profit in an inflationary environment. Inflation adjusted economic profit requires two principal alterations to Economic Value Added (EVA®). First, because inflation increases the replacement cost of non-current assets above book value, one must make a downward adjustment to EVA® to correctly measure economic profit. Second, we add a term to EVA® to represent a manager's ability to increase product price as costs increase. This adjustment is positive because this ability adds value to a firm. When a firm's assets are largely current, the first adjustment is not necessary, and therefore, the second dominates. In this case, EVA® underestimates economic profit. Economic profit remains positive when a firm's rate of return on invested capital, after tax and after depreciation, is less than the weighted average cost of capital by as much as the rate of inflation. Even when inflation is modest, unadjusted EVA® has the potential to seriously misrepresent the operating performance of a firm. [ABSTRACT FROM AUTHOR]

Proposes a standardized risk measure on the basis of the target return of drawdown criterion and investors. Expected loss of value in the required target return; Methods of measuring risk of an investment; Overview of a mean-variance analysis in which variance is used as the risk measure; Expression of the measure under some specific return distributions.

Discusses a perspective on multiple internal rates of return. Uses of an internal rate of return as a tool for evaluating deterministic cash flow streams and economic viability; Difficulties to which the method is subjected; Details on internal rates and rates of return.

Determines the differences of internal rate of return (IRR) and net present value (NPV) as indicators in investment decisions. Details of IRR as a financial indicator; Discussion on NPV as an economic indicator of a capital investment.

Focuses on the positions in engineering economy texts. Opportunity cost of capital and ranking on internal rate of return; Potential problems with opportunity cost basis for minimum attractive rate of return (MARR); Cost of capital approaches to selecting MARR; Cost of capital approaches to using MARR.

In this paper we discuss the economic evaluation of a supply chain innovation. We look at a situation in which a single manufacturer and a single distributor consider relocating assets and reengineering processes, in order to reduce total assets and total costs in the supply chain. The selling price between the manufacturer and distributor needs to be adjusted to reflect the new costs and asset levels. We investigate the price adjustment needed to maintain the ROA (Return on Assets) of both companies and to yield a nonnegative NPV (Net Present Value) for both companies. We identify conditions under which ROA and NPV yield the same results, such as the absence of implementation costs. We also demonstrate that the minimum price required by the manufacturer may lie above the maximum price acceptable for the distributor. Then the price range is empty and companies will not be able to find a price adjustment that results in a nonnegative NPV and nondecreasing ROAs for both companies. [ABSTRACT FROM AUTHOR]

Inventors, who are considering the commercialization of their inventions, can often avail themselves of evaluations and advice provided by government supported programs. In Canada, such a service is provided by the Canadian Industrial Innovation Centre (CIIC), through its inventor's assistance program (IAP). In its 20 years of operation, the IAP has evaluated more than 11,000 inventions. The fee (in Canadian [Cdn.] dollars) charged for an invention evaluation was Cdn. $262 in 1995, and these fees cover about half the program's expenses. We compute the social rate of return of the Canadian IAP under different assumptions. The most plausible estimate is a social rate of return between 36% and 70%. [ABSTRACT FROM AUTHOR]

Addresses the question of the net present value (NPV)-compatibility of the Overall Rates of Return (ORRs) and other related issues. Question on the definitions of the ORRs; Inadequacy of project ranking procedures; Presentation of correct approach to project-ranking; Rectification of some inaccurate statements and formulas.

Presents a simple methodology for calculating the profitability of an investment project. How the profitability of an investment project is usually measured by Net Present Value (NPV) or Net Final Value (NFV); Main disadvantage of methods based on imin; More information.

Examines the use of a simple heuristic for evaluation projects. Ranking projects by internal rate of return (IRR); Rejecting marginal projects; Comparison with ranking projects using net present value (NPV); Undervaluing distant cash flows with the IRR heuristic; Reduction of project managers' incentives to positively bias forecasts.

Comments on R.G. Beaves' paper titled `The Case for a Generalized Net Present Value Formula,' published in the winter 1993 issue of `The Engineering Economist.' Projects transition point and the overall rate of return; Overall rate of return (ORR) and the two transition points; Net present value (NPV) compatibility of a complete ORR criterion.

Presents computer codes for the routine implementation of the Teichroew-Robicheck-Montalbano rate-of-return formulation. Analysis of project cash flow sequences; Calculation of project investment rates; Manipulation of cash flow.

Gives a comparison of previously proposed rate of return capital budgeting methodologies. Includes a definition of parameters; Differences and similarities of alternative methodologies; Evaluation of net present value.

Discusses the Perpetuity Rate of Return (PRR) criterion for evaluating investment projects. Introduction of PRR by K.M. Howe; Unsuitability of PRR as project evaluation criterion; Incompatibility for non-positive market interest rates.