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An Analysis of Criteria for Investment and Financing Decisions Under Certainty

Author

Listed:
  • Daniel Teichroew

    (Graduate School of Business, Stanford University)

  • Alexander A. Robichek

    (Graduate School of Business, Stanford University)

  • Michael Montalbano

    (International Business Machines and Industrial Research Fellow (1963-64) Graduate School of Business, Stanford University)

Abstract

The objective of this paper is to investigate the decision-making procedure for accepting or rejecting investment or financing alternatives available to the firm. The properties of the decision rules based on discounted present value and internal rate of return are studied for the class of projects described by a finite sequence of cash flows. The necessary and sufficient conditions under which the decision rules lead to unique solutions are derived. Where the decision rule does not provide a unique solution, it is necessary to define two rates: the project investment rate and the project financing rate. The extension of the project analysis in terms of the two rates permits the derivation of unambiguous decision rules for all projects. The relevance of the results is discussed in the summary.

Suggested Citation

  • Daniel Teichroew & Alexander A. Robichek & Michael Montalbano, 1965. "An Analysis of Criteria for Investment and Financing Decisions Under Certainty," Management Science, INFORMS, vol. 12(3), pages 151-179, November.
    • Handle: RePEc:inm:ormnsc:v:12:y:1965:i:3:p:151-179
    DOI: 10.1287/mnsc.12.3.151
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