Problems in evaluating investment alternatives with one-time effects

Abstract

The most significant characteristic of the investment interventions that are the subject of this paper is that their activation periods are one year and that their cash inflows are one-time. If there are several independent operations of this type, all those with a positive net present value, and therefore an internal rate of return that is higher than the actualization rate, will be accepted. In the case of competing operations (at certain rates of actualization), especially those whose exploitation periods are different, we may have the case that one of them is better from the aspect of net present value, and the other from the aspect of internal rate of return. The decision on their proper ranking must be based on determining the net present value for exploitation periods that are mutually equal. In the paper, we analyzed two ways of equalizing exploitation periods, the method of reciprocal interventions and the method of replacement, and obtained relevant information for their ranking, which was also confirmed by the annuity method.