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An Analysis Of Alternative Net Present Value Capital Investment Decision Models

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  • Bradford, Garnett L.
  • Miller, Stephen E.

Abstract

We have found that the disagreement between Returns-to-Assets (RTA) and Returns-to-Equity (RTE) proponents is not confined to agricultural economics. Depending on the course they are taking and the accompanying text, students are likely to learn that there is a "right" way to calculate Net Present Values (NPVs), either by the RTA method or the RTE method. In most cases, only one of the two methods is discussed and illustrated with numerical examples. Less common are texts that compare the two methods, discuss their underlying assumptions, or show how the NPVs from the two methods can be reconciled. The paper is organized as follows. The first section of the main body of the paper provides a comparative overview of the RTA and RTE methods; the second section discusses our textbook survey; the final section offers our conclusions. Appendix A contains a brief history of the theoretical development of discounted cash flow (DCF) concepts. Appendix B contains additional details on defining components of NPV models. Finally, Appendix C is a listing of some additional references.

Suggested Citation

  • Bradford, Garnett L. & Miller, Stephen E., 1998. "An Analysis Of Alternative Net Present Value Capital Investment Decision Models," Working Papers 18804, Clemson University, Department of Agricultural and Applied Economics.
    • Handle: RePEc:ags:cuaewp:18804
    DOI: 10.22004/ag.econ.18804
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    References listed on IDEAS

    as
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    3. K. E. Boulding, 1935. "The Theory of a Single Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 49(3), pages 475-494.
    4. Beranek, William, 1977. "The Weighted Average Cost of Capital and Shareholder Wealth Maximization," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(1), pages 17-31, March.
    5. Fisher, Irving, 1907. "The Rate of Interest," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number fisher1907.
    6. R. K. Perrin, 1972. "Asset Replacement Principles," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 54(1), pages 60-67.
    7. Beranek, William, 1975. "The Cost of Capital, Capital Budgeting, and the Maximization of Shareholder Wealth," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(1), pages 1-20, March.
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    9. Paul A. Samuelson, 1937. "Some Aspects of the Pure Theory of Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 51(3), pages 469-496.
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