Computer Rate of Return Analysis of Mixed Capital Projects

Ward, Thomas L.

doi:10.1080/00137919408903119

Cited by 5 publications

(1 citation statement)

References 2 publications

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“…Rule (B) means that, if one assumes that, in the investment periods, the firm lends to the project at an investment rate equal to the market rate of return ( = ), 6 then the project is acceptable if and only if the PFR in the financing periods is smaller than the market financing rate ( < ). This model has found favor in the literature, especially among engineering economists (e.g., Mao 1967, Oakford et al 1977, Gronchi 1984/1987, Ward 1994, Herbst 2002, Blank and Tarquin 2012, Chiu and Garza Escalante 2012, Park 2013, Magni 2014a. See also Broverman 2008, p. 274, Kellison 2009, sometimes represented with different labels (e.g., Kulakov and Kulakova 2013), 7 used for choosing one IRR among multiple IRRs (Weber 2014) or for measuring performance of financial investments (Becker 2013).…”

Section: Proposition 8 For Any Acceptable Interest Rate (Ie Belongmentioning

confidence: 99%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

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Section: Proposition 8 For Any Acceptable Interest Rate (Ie Belongmentioning

confidence: 99%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

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A Simple Method for Calculating thei_minRate for an Investment Project

Pasin

Leblanc

1996

The Engineering Economist

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The relative and incremental information content of earnings vs cash recovery rates

Said

Hassabelnaby

Nowlin³

2008

Review of Accounting and Finance

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PurposeThe purpose of this paper is to examine the relative and incremental information content of a cash recovery‐based measure of performance, the estimated internal rate of return, vs an earnings‐based measure of performance, return on assets, in explaining firms' economic performance.Design/methodology/approachThe paper uses the cash recovery rate that is based on continuous time analysis and U‐shaped cash flows to derive the estimated internal rate of return and compare it to return on assets. A cross‐sectional sample was used over a short interval (year 1993 and year 2005) and a time‐series sample (1993‐2005) to empirically examine the relative and incremental information content of the competing measures. Tobin's q and stock returns are used as performance benchmarks.FindingsThe results of the empirical tests indicate that the estimated internal rate of return provides better relative and incremental information content over earnings‐based measures of performance. Specifically, the empirical evidence shows that the estimated internal rate of return is consistently positively related to Tobin's q and stock returns over all measurement intervals.Research limitations/implicationsThese results imply that earnings‐based performance measures are less value relevant compared to cash recovery‐based measures. There are some limitations that may apply to this study. First, the systematic measurement error in estimating the cash recovery rate may not be independent of the measurement error in the estimated internal rate of return. Second, the performance benchmarks used in the study are not free from problems. Particularly, the return on assets is influenced by firms' rate of growth and the Tobin's q is not a perfect measure of business performance. Therefore, one avenue of future research is to assess the usefulness of financial accounting data for analysts forecast. Moreover, future research may also examine the role of institutional changes in financial reporting and its effect on the quality of earnings and economic performance.Originality/valueThis paper presents extended research on cash recovery‐based vs earnings‐based metrics as proxies for economic return using improved research designs, larger samples and new sensitivity analyses.

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Computer Rate of Return Analysis of Mixed Capital Projects

Cited by 5 publications

References 2 publications

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Capital depreciation and the underdetermination of rate of return: A unifying perspective

A Simple Method for Calculating thei_minRate for an Investment Project

The relative and incremental information content of earnings vs cash recovery rates

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Computer Rate of Return Analysis of Mixed Capital Projects

Cited by 5 publications

References 2 publications

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Capital depreciation and the underdetermination of rate of return: A unifying perspective

A Simple Method for Calculating theiminRate for an Investment Project

The relative and incremental information content of earnings vs cash recovery rates

Contact Info

Product

Resources

About

A Simple Method for Calculating thei_minRate for an Investment Project