Search

This article reports closed-form probability density function and related expressions of the internal rate of return for one- and two-period pure and simple probabilistic engineering economy problems. The random cash flows are either uniform or exponential variables. In addition, there is no correlation between the cash flows. The probability density function of the internal rate of return is an important tool that helps decision makers estimate the probability of the internal rate of return exceeding the minimum attractive rate of return. Hillier's method (1963) using normal cash flows is also evaluated when the cash flows are uniformly distributed. [ABSTRACT FROM AUTHOR]

The Engineering Economist is a journal that focuses on data-driven engineering economic models to support capital investment decisions in uncertain economic conditions. The latest issue features articles on various topics. The first article introduces a project valuation framework that incorporates Economic Value Added (EVA) and Market Value Added (MVA) analysis into a binomial tree option pricing model. The second article merges earlier work on valuation and growth expectations with the Average Internal Rate of Return (AIRR) models, simplifying calculations for expected competitive advantage and growth rates. The third article utilizes real options analysis to assess uncertainty in the copper concentrate trading business. The journal publishes original research, case studies, surveys, and reviews related to capital investment problems. [Extracted from the article]

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]

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]

The article surveys contributions to the literature covering the field of probabilistic discounted cash flow (DCF) analysis of individual capital investments from the earliest contributions of the 1960s to today. Such analysis includes the methods of present worth (net present value), annual worth, future worth, internal rate of return, payback period, and benefit:cost ratio. The history and development of the probabilistic case is traced, listing the main assumptions made and any restrictions to applications. The survey will be found useful by those engaged in risk management and decisions associated with investments and budgeting having uncertain outcomes. [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]

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.

A pure investment is defined here as any transaction where the invested capital is nonnegative at all times during the life of the transaction. This article proves that any transaction whose first non-zero term is negative can be uniquely partitioned into pure investments with strictly decreasing internal rates of return (IRRs). The IRRs of the partitioning transactions put bounds on the IRRs of the original transaction. The partitioning theorem gives a simple characterisation of Arrow/Levhari's results on the optimal truncation of a transaction. The partitioning theorem also has applications to the problem of the optimal time for an investor to sell the remaining terms in a transaction. [ABSTRACT FROM AUTHOR]

The article presents an alternative and original method for establishing the present worth and feasibility of a capital investment where the underlying parameters of interest/discount rate, cash flows. and investment lifespan are uncertain. The method, based on Markov chains, complements existing and useful practices such as sensitivity analysis, Monte Carlo simulation, Hillier-style probabilistic analysis, and fuzzy sets. For the same underlying assumptions, the results of this alternative approach are the same as for these existing approaches, but the approach provides additional insight into discounted cash flow (DCF) analysis under uncertainty. The method will be found useful to persons doing investment analysis and looking at the risks associated with investment. [ABSTRACT FROM AUTHOR]

Provides information on a study on the capital investment practices of the United States-based companies in the Standard & Poor's Industrial Index. Research design and data; Discussion of results; Conclusions.

The levelized cost of energy is commonly used in both policymaking and capital investment decisions. It unitizes capital costs by amortizing them over an assumed asset life. The life of the asset is usually assumed to be known with certainty. But in many electric power applications, the life is both uncertain and subject to regulatory shocks. In these cases, the standard levelized cost of energy calculation is incorrect and potentially misleading. We propose a corrected version of this measure using expectation under a probability model for shortened life and show its implications for several investment and policy applications. [ABSTRACT FROM AUTHOR]

The empirical inadequacy of direct application of stochastic dominance rules and their variants has led to the development of statistical tests for making dominance inferences. Yet very little is known about their application in capital investment planning, and the algorithms for their implementation are not readily available to the analyst who uses spreadsheets for capital investment planning. Therefore, this article develops a spreadsheet framework for conducting empirical tests of stochastic dominance when comparing alternative capital investment plans under uncertainty. It uses bootstrap and simulation methodology to compute thep-values required for making first- and second-order dominance inferences. Results from numerical examples show that empirical tests yield robust inferences when the structure of risk profiles and their integrals is such that dominance inferences by visual inspection are difficult. Therefore, analysts should model and empirically test for these relationships if they want to make defensible decisions when comparing risky capital investments. [ABSTRACT FROM AUTHOR]

The aim of this article is to identify the relative importance of technical and economic variables in the financial feasibility of repowering wind farm projects. A financial valuation model is developed. We carry out a sensitivity analysis with several variables considered to be key in the repowering decision. The most relevant technical variable is the increase in production efficiency and the most relevant economic variable is the capital expenditures in new equipment. Furthermore, the decision to repower critically depends upon the level of support being provided. The repowering project would not be feasible in the absence of support. [ABSTRACT FROM PUBLISHER]

We extend Myers' (1974) adjusted present value method and modify Modigliani and Miller's (1958, 1963) capital structure propositions by adding government as the firms ' third major financial stakeholder. Government is a major stakeholder because it collects income taxes, is instrumental in establishing the business environment, and provides business infrastructure to corporations. We assume that government's stake is an implicit form of capital and, consequently, any return or benefit derived by the firm from this implicit capital will affect firm value. As a result, tax structure significantly impacts relative stakeholder values, capital investment decisions, and capital formation. Only in the special case when the firm receives explicit benefits and when the return on government's implicit capital is equal to the firm's cost of equity capital will corporate taxes not impact firm value and capital investment decisions. Although tax irrelevance and the conservation of value principle may hold true within a domestic economy with a homogenous tax structure, our three-stakeholder model demonstrates that corporate income taxes become relevant for investment decisions in a globally competitive economy with heterogeneous tax structures. Thus, our model addresses the apparent inconsistencies between existing theory, which characterizes corporate taxes as nondistortionary, and empirical findings, which demonstrate that taxes reduce investments, growth, and valuation ratios. [ABSTRACT FROM AUTHOR]

A new replacement analysis methodology is developed and demonstrated to determine system-level component replacement schedules for electricity distribution systems composed of sets of heterogeneous assets. The proposed model is an iterative combined dynamic programming and integer programming approach to obtain cost-efficient system-level component replacement schedules with the objective of minimizing the total net present value of unmet demand (considering the system availability), maintenance, and purchase costs over a finite planning horizon. There is an annual budget limiting total expenditures for maintenance and replacement costs that limits the selection of component replacement schedules. [ABSTRACT FROM AUTHOR]

The inability of classic NPV analysis to capture the future value of options in a capital budgeting analysis is now well documented by Trigeorgis (1993, 2005), Copeland and Antikarov (2001), and others. In spite of this, traditional NPV analysis continues to be described as a normative approach. The author surveys Fortune 1,000 companies to see if they have picked up on the use of real options to complement traditional analysis. Out of 279 respondents, 40 were currently using real options (14.3%). While the percentage is small, the number is higher than in previous studies. The author goes on to describe in what manner real options are being used and, of equal importance, why they are resisted by many. Somewhat encouraging is the intent of well over half the nonusers to consider the use of real options in the future. [ABSTRACT FROM AUTHOR]

The Engineering Economist is a refereed journal published jointly by the Engineering Economy Division of the American Society of Engineering Education (ASEE) and the Institute of Industrial Engineers (IIE). The journal publishes articles, case studies, surveys, book and software reviews, and readers' comments that represent current research, practice, and teaching involving problems of capital investment.The journal seeks submissions in a number of areas, including, but not limited to, capital investment analysis, cost estimation and accounting, cost of capital, design economics, economic decision analysis, education, policy analysis (i.e., governmental), and research and development.As noted in the editorial, we are celebrating the 50th volume of our journal and we are taking this opportunity to reinvigorate our purpose. This is to be facilitated with the designation of area editors assigned to specific submission focus areas. These areas are clearly defined below and the representative area editors are introduced. Their contact information is provided in case prospective authors have questions about potential submissions in prospective areas. However, all submissions should be sent to the editor-in-chief. The focus areas are listed alphabetically, followed by case study and book/software review submission guidelines. Following the definition of the areas are the new electronic submission guidelines for the journal. [ABSTRACT FROM AUTHOR]

Proposes an after-tax version of the classical capital recovery equation and demonstrated its value as a screening device and as an expository tool to convey conceptual understanding of the cost of ownership, capital recovery and depreciation. Role of accountants in capital project appraisal; Equation for the annual cost of ownership of an asset; Depreciation associated with the asset producing the revenue stream.

Examines managerial advantages of using payback as a surrogate for net present value used for investment decisions. Overview of taxation and of ranking decisions using profitability indices; Asymmetries of information between superior and subordinate managers; Reasons for the possible decision of subordinate managers to reject projects that their superiors would have accepted given equivalent information.

This paper discusses a measure for estimating the wealth creation potential of capital investments in manufacturing. The measure, called "Economic Value Added," has recently become popular in the United States and can be derived from an after-tax analysis of cash flows generated by a capital investment. A proposed investment in manufacturing capacity is analyzed to illustrate the after-tax cash flow calculations required to determine its EVA potential. [ABSTRACT FROM AUTHOR]