A simple intuitive NPV-IRR consistent ranking

Ben-Horin, Moshe; Kroll, Yoram

doi:10.1016/j.qref.2017.01.004

Cited by 18 publications

(13 citation statements)

References 10 publications

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“…As investment projects in forest stands have unconventional cash flows, the profitability of these projects was analyzed based on the modified internal rate of return (MIRR). This method is achieved by adding all the positive interim cash flows to the end of the project lifecycle and discounting all the negative interim cash flows to the beginning of the project life cycle [38]. Notably, MIRR was developed by Duvillard in 1787 [39], expressed as:…”

Section: Quantitative Methods Of Investment Analysismentioning

confidence: 99%

Investment Uncertainty Analysis in Eucalyptus Bole Biomass Production in Brazil

Simões

Dinardi

Silva

2018

Forests

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Forestry investment projects for the biomass production of the eucalyptus bole can be characterized by uncertain environments, which result in economic risk to the forest producer, however that can be measured by applying probabilistic techniques. This was our motivation and justification for analyzing the economic-financial viability of different silvicultural practices for eucalyptus bole biomass production under conditions of uncertainties, running Monte Carlo method for risk management. The experiment was carried out in the state of São Paulo, Brazil, using 5 treatments with spacings of 3 m × 2 m; 3 m × 1 m; 1.5 m × 2 m; 3 m × 0.5 m; and 1.5 m × 1.0 m, i.e., different spacings between planting lines and plants. These treatments were characterized as investment projects. To develop stochastic models, we relied on technical-economic deterministic variables. We evaluated the investment projects based on the cash flows under conditions of uncertainty, discounted at the attractiveness rate calculated by capital asset pricing model. With the results of these economic flows, the net present value, the modified internal rate of return and the profitability index values were estimated, commonly used in the analysis of investments in projects. The results showed that based on economic metrics, the three-year rotation cycle for forest stands for biomass production of the main bole of eucalyptus, with a spacing of three meters between rows and two meters between plants, had an 83% probability of economic success. The sensitivity analysis showed that the bole biomass of eucalyptus is the most important variable for determining the economic-financial feasibility of the investment project.

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Section: Quantitative Methods Of Investment Analysismentioning

confidence: 99%

Investment Uncertainty Analysis in Eucalyptus Bole Biomass Production in Brazil

Simões

Dinardi

Silva

2018

Forests

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“…[42] compare the MIRR with the expected rate of return and emphasize that when the value of the first is higher than the value of the second, the investment is economically feasible. [43] emphasize that MIRR transforms the original multi-period project into a project that contains only a negative initial cash flow and a positive final cash flow. In this sense, the investment project in mineral assets indicated a 100% probability of the MIRR being superior to the WACC, which ensures the maximization of the company's market value based on the applied capital.…”

Section: Risk Analysismentioning

confidence: 99%

Management of economic and financial risk of investments in assets for extraction of non-metallic mineral extracts

Martinez¹,

Batistela²,

Simões³

2021

Ingeniare. Rev. chil. ing.

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The investment projects evaluation in real assets is essential for decision making; however, undoubtedly, it is a process whose components have interdependent relationships, which generate uncertainties that can lead to the wrong acceptance or rejection of the investment. This study aimed to apply the Monte Carlo simulation to the risk incorporation into the economic and financial evaluation of an investment project in mineral assets under conditions of uncertainties, with a view to the obtained returns measurement. Thus, the evaluation was based on the projection of discounted cash flow, which allowed the adoption of methods commonly used to evaluate real assets that consider the time value of the money. The economicfinancial risk incorporation was performed using a stochastic and dynamic mathematical model, and the Monte Carlo method was used to generate values from probability distributions. The results showed that the investment project in mineral assets is economically feasible by adding value to investors.

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“…Examples of these techniques are the Modified Internal Rate of Return or MIRR [14,15], the Average Internal Rate of Return or AIRR [16,17], the Generalized Internal Rate of Return (GIRR) and Generalized External Rate of Return (GERR) [18,19] and the Quasi-Internal Rate of Return for projects with no IRR [20]. The second group uncovers the functional relationship between NPV and IRR [11,21,22]. The third group interprets and provides insight into multiple IRRs [11,23,24].…”

Section: State Of the Artmentioning

confidence: 99%

Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?

2018

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Public Private Partnerships (PPP) are viewed by the private sector as investment projects. An investment criterion, such as the internal rate of return (IRR), widely used by practitioners, is thus necessary in order to determine if the opportunity is sustainable from an economic point of view and worth pursuing. However, a cash flow may have multiple IRRs—is it appropriate in the context of PPPs to use this criterion? This paper provides a clear proposition to determine the potential number of real positive IRRs a cash flow may have, depending on the number of sign variations and the value of the net present value (NPV) calculated with a discount rate equal to 0 (NPV(r = 0)). This proposition can sometimes be used when other tests (such as Norstrom’s Criterion) are inconclusive to determine if a cash flow has a single real positive IRR. The proposition is generally met by the typical cash flow of a PPP project, validating the use of IRR as an investment criterion.

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A simple intuitive NPV-IRR consistent ranking

Cited by 18 publications

References 10 publications

Investment Uncertainty Analysis in Eucalyptus Bole Biomass Production in Brazil

Investment Uncertainty Analysis in Eucalyptus Bole Biomass Production in Brazil

Management of economic and financial risk of investments in assets for extraction of non-metallic mineral extracts

Is It Correct to Use the Internal Rate of Return to Evaluate the Sustainability of Investment Decisions in Public Private Partnership Projects?

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