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Ranking investment projects

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  • James E. Foster
  • Tapan Mitra

Abstract

This paper describes conditions under which one investment project dominates a second project in terms of net present value, irrespective of the choice of the discount rate. The resulting partial ordering of projects has certain similarities to stochastic dominance. However, the structure of the net present value function leads to characterizations that are quite specific to this context. Our theorems use Bernstein's (1915) innovative results on the representation and approximation of polynomials, as well as other general results from the theory of equations, to characterize the partial ordering. We also show how the ranking is altered when the range of discount rates is limited or the rate varies period by period. Copyright Springer-Verlag Berlin Heidelberg 2003

Suggested Citation

  • James E. Foster & Tapan Mitra, 2003. "Ranking investment projects," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 22(3), pages 469-494, October.
    • Handle: RePEc:spr:joecth:v:22:y:2003:i:3:p:469-494
    DOI: 10.1007/s00199-002-0339-y
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    References listed on IDEAS

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    1. Foster, James E. & Shorrocks, Anthony F., 1988. "Inequality and poverty orderings," European Economic Review, Elsevier, vol. 32(2-3), pages 654-661, March.
    2. J. Hirshleifer, 1958. "On the Theory of Optimal Investment Decision," Journal of Political Economy, University of Chicago Press, vol. 66(4), pages 329-329.
    3. Ekern, Steinar, 1981. "Time Dominance Efficiency Analysis," Journal of Finance, American Finance Association, vol. 36(5), pages 1023-1034, December.
    4. repec:bla:scandj:v:82:y:1980:i:1:p:45-58 is not listed on IDEAS
    5. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975.
    6. Sen, Amartya, 1975. "Minimal conditions for monotonicity of capital value," Journal of Economic Theory, Elsevier, vol. 11(3), pages 340-355, December.
    7. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
    8. Pratt, John W & Hammond, John S, III, 1979. "Evaluating and Comparing Projects: Simple Detection of False Alarms," Journal of Finance, American Finance Association, vol. 34(5), pages 1231-1242, December.
    9. repec:bla:econom:v:50:y:1983:i:197:p:3-17 is not listed on IDEAS
    10. Foster, James E & Shorrocks, Anthony F, 1988. "Poverty Orderings," Econometrica, Econometric Society, vol. 56(1), pages 173-177, January.
    11. Michael Bruno & Edwin Burmeister & Eytan Sheshinski, 1966. "The Nature and Implications of the Reswitching of Techniques," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 80(4), pages 526-553.
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    Cited by:

    1. Bastianello, Lorenzo & Chateauneuf, Alain, 2016. "About delay aversion," Journal of Mathematical Economics, Elsevier, vol. 63(C), pages 62-77.
    2. John K. -H Quah & Bruno Strulovici, 2009. "Discounting and Patience in Optimal Stopping and Control Problems," Discussion Papers 1480, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. Murat Sertel & Arkadii Slinko, 2007. "Ranking committees, income streams or multisets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(2), pages 265-287, February.
    4. Christopher P. Chambers & Federico Echenique, 2020. "The Pareto Comparisons of a Group of Exponential Discounters," Mathematics of Operations Research, INFORMS, vol. 45(2), pages 622-640, May.
    5. John Quah & Bruno Strulovici, 2011. "Discounting, Patience, and Dynamic Decision Making," Economics Series Working Papers 555, University of Oxford, Department of Economics.
    6. Marchioni, Andrea & Magni, Carlo Alberto, 2018. "Investment decisions and sensitivity analysis: NPV-consistency of rates of return," European Journal of Operational Research, Elsevier, vol. 268(1), pages 361-372.
    7. repec:ipg:wpaper:30 is not listed on IDEAS
    8. repec:ipg:wpaper:2013-030 is not listed on IDEAS

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    More about this item

    Keywords

    JEL Classification Numbers: D92; G31; H043; O22.; Keywords and Phrases: Investment projects; Present value; Stochastic dominance; Polynomials; Rate of return over cost; Time dominance.;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • O22 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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