NPV-Compatibility, Project Ranking, and Related Issues

Hajdasiński, Miroslaw M.

doi:10.1080/00137919708903186

Cited by 10 publications

(6 citation statements)

References 15 publications

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“…This understanding of NPV is used in capital budgeting and investment planning, enabling analysis of a projected investment or project [11]. The application of NPV in capital budgeting and investments is widely presented in the literature, e.g., [7,[12][13][14][15][16][17][18][19][20][21][22][23][24][25][26][27]. The researchers emphasise the importance of NPV for investment planning.…”

Section: Literature Reviewmentioning

confidence: 99%

“…The researchers emphasise the importance of NPV for investment planning. Net Present Value enables the comparison between the money that must be paid to complete the planned investment with all the cash flows that the undertaking will generate in the future [7,[12][13][14][15][16][17][18][19][20][21][22][23][24][25][26][27].…”

Section: Literature Reviewmentioning

confidence: 99%

“…However, we notice ongoing discussion based on the literature presented above. We also notice discussion on factors influencing NPV [13][14][15][16][17][18][19][20][21]24,[31][32][33]. Percoco and Borgonovo [34] and others [35][36][37][38] analyse the dependencies between the NPV and the internal rate of return (IRR).…”

Section: Literature Reviewmentioning

confidence: 99%

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Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Dobrowolski

Drozdowski

2022

Energies

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Surprisingly, little is known whether the net present value (NPV) used as a financial metric in budgeting and investment planning to analyse a projects’ profitability is universal. Meanwhile, the epochal green energy revolution ensuring carbon neutrality through green innovations requires enormous investments, and projects realised must ensure energy security. Therefore, there is a need to reanalyse financial metrics used in financial planning, including NPV. We eliminate this research gap and, based on data from Poland, Romania, Hungary, Croatia, the USA, the United Kingdom, Japan, Israel, and Euro Zone, explain why one may not perceive the currently used NPV formula as a universal financial metric. We show that the variable discount rate influences the time value of money. Therefore, there is a need to redefine the NPV formula. This study makes two main contributions. First, it creates new ground by revisiting the NPV formula in the emerging market context compared to stable economies and contributes to developing business and management theory. Second, we propose and empirically verify the modified NPV formula as a financial metric that considers the situation of energy firms in emerging markets. Thus, this research helps the capital budgeting process, and the modified NPV formula can help provide optimal outcomes in firms, helping to reduce financial risks. Our study contributes to a further contextual diagnosis of business projects and can, in turn, be relevant for other energy sector analyses.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Literature Reviewmentioning

confidence: 99%

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Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Dobrowolski

Drozdowski

2022

Energies

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“…Net-present-value consistency of a performance metric means that the decisions recommended by the metric are the same as the ones recommended by the NPV criterion. The literature on NPV-consistent (or NPV-compatible) measures is enormous and spans over several decades (e.g., see Hajdasinski 1995, 1997, Hartman 2000, Hartman and Schafrick 2004, Pfeiffer 2004, Gow and Reichelstein 2007, Lindblom and Sjögren 2009, Chiang, Cheng and Lam 2010 Padilla and Jadotte 2013).…”

Section: Introductionmentioning

confidence: 99%

Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach

Magni

Marchioni

2020

International Journal of Production Economics

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In project appraisal under uncertainty, the economic reliability of a measure of financial efficiency depends on its strong NPV-consistency, meaning that the performance metric (i) supplies the same recommendation in accept-reject decisions as the NPV, (ii) ranks competing projects in the same way as the NPV, (iii) has the same sensitivity to perturbations in the input data as the NPV. In real-life projects, financial efficiency is greatly affected by the management of the working capital. Using a sensitivity analysis approach and taking into explicit account the role of working capital, we show that the average return on investment (ROI) is not strongly NPV-consistent in accept-reject decisions if the working capital is uncertain and changes under changes in revenues and costs. Also, it is not strongly NPV-consistent in project ranking. We also show that the internal rate of return (IRR) is not strongly NPV-consistent and economic analysis may even turn out to be impossible, owing to possible nonexistence and multiplicity caused by perturbations in the input data, as well as to possible shifts in the financial meaning of IRR under changes in the project's value drivers. We introduce the straight-line rate of return (SLRR), based on the notion of average rate of change, which overcomes all the problems encountered by average ROI and IRR: It always exists, is unique, strongly NPV-consistent for both accept-reject decisions and project ranking, and has an unambiguous financial nature.

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“…melhorados" e esses estudos podem complementar e/ou fornecer informações adicionais sobre como resolver os problemas decorrentes das deficiências do método da TIR convencional. Para uma análise mais profunda sobre o assunto, sugere-se a leitura dos seguintes artigos, além dos examinados nesse trabalho: Lorie e Savage (1955), Bierman e Smith (1957), Teichroew et al (1965a e 1965b), Mao (1966), Pegels (1968), Adler (1970), Negrete (1978), Athanasopoulos (1978b e 1980), Berhnard (1979ª, 1979b e 1989), Beaves (1988, 1993, 1994 e 2005), McDaniel et al (1988), Shull (1992, 1993 e 1994), Anderson e Barber (1994), Lee e Kim (1994),Hajdasinski (1993Hajdasinski ( , 1995Hajdasinski ( , 1996Hajdasinski ( , 1997Hajdasinski ( e 2004,Lefley (1997Lefley ( , 1998Lefley ( , 2003), Keef e Olowo-Okere (1998), Chang e Swales (1999), Vélez-Pareja (2000), Srinivasa (2005), Crean (2005), Biondi (2006) e Kieruff (2008). Enquanto muitos profissionais estão familiarizados com os procedimentos da TIR tradicional, o método da TIRM é menos intensamente conhecido.…”

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Métodos Modificados De Avaliação De Investimentos Em Condições De Incerteza: Uma Abordagem Baseada Em Números Fuzzy

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NPV-Compatibility, Project Ranking, and Related Issues

Cited by 10 publications

References 15 publications

Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Does the Net Present Value as a Financial Metric Fit Investment in Green Energy Security?

Average rates of return, working capital, and NPV-consistency in project appraisal: A sensitivity analysis approach

Métodos Modificados De Avaliação De Investimentos Em Condições De Incerteza: Uma Abordagem Baseada Em Números Fuzzy

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