IDEAS home Printed from https://ideas.repec.org/a/bla/econpa/v38y2019i1p56-69.html
   My bibliography  Save this article

Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems

Author

Listed:
  • Kannapiran C. Arjunan

Abstract

The causes and effects of non‐monotonic NPV functions are evaluated and the results presented in this paper. Reinvestment of intermediate income causes non‐monotonic NPV function. Non‐monotonic NPV function not only leads to multiple IRRs but also to spurious NPVs. The capital amortisation (CAS) method used in this analysis transparently reveals if there is any reinvestment. A modified CAS method, discussed in this paper, eliminates the reinvestment and resolves the problems of non‐monotonic NPV function, reinvestment, spurious NPVs and multiple IRR. The current practice of using NPV as the preferred criterion, when there are multiple IRRs, is not appropriate.

Suggested Citation

  • Kannapiran C. Arjunan, 2019. "Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems," Economic Papers, The Economic Society of Australia, vol. 38(1), pages 56-69, March.
    • Handle: RePEc:bla:econpa:v:38:y:2019:i:1:p:56-69
    DOI: 10.1111/1759-3441.12239
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/1759-3441.12239
    Download Restriction: no
    File URL: https://libkey.io/10.1111/1759-3441.12239?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Weber, Thomas A., 2014. "On the (non-)equivalence of IRR and NPV," Journal of Mathematical Economics, Elsevier, vol. 52(C), pages 25-39.
    2. Peter Mackie & John Nellthorp & James Laird, 2005. "Notes on the Economic Evaluation of Transport Projects," World Bank Publications - Reports 11787, The World Bank Group.
    3. Ezra Solomon, 1956. "The Arithmetic of Capital-Budgeting Decisions," The Journal of Business, University of Chicago Press, vol. 29, pages 124-124.
    4. Peter Mackie & John Nellthorp & James Laird, 2005. "Notes on the Economic Evaluation of Transport Projects : Fiscal Impacts," World Bank Publications - Reports 11794, The World Bank Group.
    5. James H. Lorie & Leonard J. Savage, 1955. "Three Problems in Rationing Capital," The Journal of Business, University of Chicago Press, vol. 28, pages 229-229.
    6. Kannapiran C. Arjunan & Karthi Kannapiran, 2017. "Cost-benefit Analysis and the Controversial Reinvestment Assumption in IRR and NPV Estimates: Some New Evidence Against Reinvestment Assumption," Economic Papers, The Economic Society of Australia, vol. 36(3), pages 351-363, September.
    7. Gronchi, Sandro, 1986. "On Investment Criteria Based on the Internal Rate of Return," Oxford Economic Papers, Oxford University Press, vol. 38(1), pages 174-180, March.
    8. Peter Mackie & John Nellthorp & James Laird, 2005. "Notes on the Economic Evaluation of Transport Projects," World Bank Publications - Reports 11791, The World Bank Group.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.
    2. Chiara Pancotti & Matteo Pedralli & Geert Smit & Silvia Vignetti, 2020. "Understanding transport project appraisal in its institutional dimension," Working Papers 201902, CSIL Centre for Industrial Studies.
    3. Pierluigi Coppola & Diego Deponte & Alessandro Vacca & Federico Messa & Fulvio Silvestri, 2022. "Multi-Dimensional Cost-Effectiveness Analysis for Prioritizing Railway Station Investments: A General Framework with an Application to the Italian Case Study," Sustainability, MDPI, vol. 14(9), pages 1-18, April.
    4. Andronis, Lazaros & Maredza, Mandy & Petrou, Stavros, 2019. "Measuring, valuing and including forgone childhood education and leisure time costs in economic evaluation: Methods, challenges and the way forward," Social Science & Medicine, Elsevier, vol. 237(C), pages 1-1.
    5. Alexandr V. Zhevnyak, . "Reference," NEW CONCEPT OF RETURN ON BORROWED AND INVESTMENT PROJECTS,, Socionet.
    6. Sokolov, Mikhail V., 2024. "NPV, IRR, PI, PP, and DPP: A unified view," Journal of Mathematical Economics, Elsevier, vol. 114(C).
    7. Carlo Alberto Magni, 2003. "Decomposition of Net Final Values: Systemic Value Added and Residual Income," Bulletin of Economic Research, Wiley Blackwell, vol. 55(2), pages 149-176, April.
    8. Zi-Yun Zhang & Fang-Le Peng & Chen-Xiao Ma & Hui Zhang & Su-Juan Fu, 2021. "External Benefit Assessment of Urban Utility Tunnels Based on Sustainable Development," Sustainability, MDPI, vol. 13(2), pages 1-23, January.
    9. Carlo Alberto Magni, 2010. "Average Internal Rate of Return and investment decisions: A new perspective," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    10. Petr Marek, 2007. "Notes about Study on History of Theoretical Approaches to Investment Decision [Poznámky ke studiu historie teoretických přístupů k investičnímu rozhodování]," Český finanční a účetní časopis, Prague University of Economics and Business, vol. 2007(4), pages 23-29.
    11. Glenn Lyons & Greg Marsden, 2021. "Opening out and closing down: the treatment of uncertainty in transport planning’s forecasting paradigm," Transportation, Springer, vol. 48(2), pages 595-616, April.
    12. Yuri Biondi, 2006. "The double emergence of the Modified Internal Rate of Return: The neglected financial work of Duvillard (1755 - 1832) in a comparative perspective," The European Journal of the History of Economic Thought, Taylor & Francis Journals, vol. 13(3), pages 311-335.
    13. Carlo Alberto Magni, 2009. "Accounting and economic measures: an integrated theory of capital budgeting," Proyecciones Financieras y Valoración 5983, Master Consultores.
    14. Magni, Carlo Alberto, 2005. "On decomposing net final values: EVA, SVA, and shadow project," MPRA Paper 12357, University Library of Munich, Germany.
    15. Mária Illés, 2020. "The Positive Net Present Value of Loss-making Projects: Economic Content of the Two Internal Rates of Return," Theory Methodology Practice (TMP), Faculty of Economics, University of Miskolc, vol. 16(02), pages 41-50.
    16. Tobin, Roger L., 1999. "A fast interactive solution method for large capital expenditure selection problems," European Journal of Operational Research, Elsevier, vol. 116(1), pages 1-15, July.
    17. Putna, Ondřej & Janošťák, František & Šomplák, Radovan & Pavlas, Martin, 2018. "Demand modelling in district heating systems within the conceptual design of a waste-to-energy plant," Energy, Elsevier, vol. 163(C), pages 1125-1139.
    18. Hanafi, Said & Freville, Arnaud, 1998. "An efficient tabu search approach for the 0-1 multidimensional knapsack problem," European Journal of Operational Research, Elsevier, vol. 106(2-3), pages 659-675, April.
    19. Yuri Biondi, 2009. "Capital budgeting under relational contracting: optimal ranking and duration criteria for schemes of concession, project-financing and public-private partnership," Post-Print hal-00404305, HAL.
    20. Annalisa De Boni & Antonia D’Amico & Claudio Acciani & Rocco Roma, 2022. "Crop Diversification and Resilience of Drought-Resistant Species in Semi-Arid Areas: An Economic and Environmental Analysis," Sustainability, MDPI, vol. 14(15), pages 1-15, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:econpa:v:38:y:2019:i:1:p:56-69. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/esausea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.