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Chisini means and rational decision making: Equivalence of investment criteria

Author

Listed:
  • Magni, Carlo Alberto
  • Veronese, Piero
  • Graziani, Rebecca

Abstract

A plethora of tools are used for investment decisions and performance measurement, including Net Present Value (NPV), Internal Rate of Return (IRR), Profitability Index (PI), Modified Internal Rate of Return (MIRR), Average Accounting Rate of Return (AARR). All these and other known metrics are generally considered non-equivalent and some of them are regarded as unreliable or even naive. Building upon Magni (2010a, 2013)'s Average Internal Rate of Return (AIRR), we show that the notion of Chisini mean enables these tools to be used as rational decision criteria. Specifically, we focus on 11 metrics and show that, if properly used, they all provide equivalent accept-reject decisions and equivalent project rankings. Therefore, the intuitive notion of mean is the founding basis of investment decision criteria.

Suggested Citation

  • Magni, Carlo Alberto & Veronese, Piero & Graziani, Rebecca, 2017. "Chisini means and rational decision making: Equivalence of investment criteria," MPRA Paper 81532, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:81532
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    References listed on IDEAS

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    2. Magni, Carlo Alberto, 2015. "Investment, financing and the role of ROA and WACC in value creation," European Journal of Operational Research, Elsevier, vol. 244(3), pages 855-866.
    3. Carlo Alberto Magni, 2015. "Investment, financing and the role of ROA and WACC in value creation," Department of Economics 0050, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
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    5. 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.
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    7. Graziani, Rebecca & Veronese, Piero, 2009. "How to Compute a Mean? The Chisini Approach and Its Applications," The American Statistician, American Statistical Association, vol. 63(1), pages 33-36.
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    9. Carlo Alberto Magni, 2009. "Accounting and economic measures:An integrated theory of capital budgeting," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0019, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
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    12. 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".
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    16. Carlo Alberto Magni, 2010. "Depreciation Classes, Return on Investment and Economic Profitability," Proyecciones Financieras y Valoración 7781, Master Consultores.
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    Cited by:

    1. Magni, Carlo Alberto & Martin, John D., 2017. "The Reinvestment Rate Assumption Fallacy for IRR and NPV: A Pedagogical Note," MPRA Paper 83889, University Library of Munich, Germany.

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    More about this item

    Keywords

    Value creation; accept-reject decisions; project ranking; equivalence class; Net Present Value; Average Internal Rate of Return;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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