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Ranking of Mutually Exclusive Investment Projects: How Cash Flow Differences can solve the Ranking Problem

Author

Listed:
  • Christian Kalhoefer

    (Faculty of Management Technology, The German University in Cairo)

Abstract

The discussion about the best method to be used in capital budgeting has been long and intensive. Differences between Net Present Value and Internal Rate of Return seem to cause everlasting problems, while especially the Internal Rate of Return often is neglected as an appropriate measure. A famous example of the problems caused by the different approaches is the ranking of mutually exclusive projects. The following paper is presenting an easy explanation, without introducing new and more complicated measures, but by simply explaining the nature of and differences between Net Present Value and Internal Rate of Return.

Suggested Citation

  • Christian Kalhoefer, 2007. "Ranking of Mutually Exclusive Investment Projects: How Cash Flow Differences can solve the Ranking Problem," Working Papers 3, The German University in Cairo, Faculty of Management Technology.
    • Handle: RePEc:guc:wpaper:3
    as

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    File URL: http://mgt.guc.edu.eg/wpapers/003kalhoefer2007.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
    1. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
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    More about this item

    Keywords

    Capital budgeting; internal rate of return; net present value; ranking problem; incremental approach; reinvestment rate;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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