Definition of the concepts of conventional and non-conventional projects

Abstract

The term "non-conventional" project or "project with non-conventional cash fl ows" was introduced into economic literature after the internal rate of return (IRR) was shown to have multiple values or not exist at all in some projects. A project is considered to be conventional if it has only one change in the cash fl ow sign, no matter whether minus to plus or vice versa. A conventional project has a unique IRR. However, not all projects with a multiple sign change in cash fl ow are non-conventional, i.e. have problems with IRR determination. To ascertain the project type, the generally accepted approach recommends investigating monotony of the net present value (NPV) depending on the discount rate in order to fi nd out how many IRRs the project has. On the other hand, neither the monotony of the NPV function nor a unique IRR guarantee that the project is conventional. The IRR is known to be a rate of return for a conventional investment project rather than a non-conventional project. Moreover, it was shown that the rate of return of a non-conventional project cannot be determined within the framework of the NPV method, and therefore the concept of profi tability cannot be formulated. The recently proposed generalized net present value (GNPV) method allows us to determine the rate of return of a non-conventional project. This paper presents a method to determine the rate of return for an investment project of any type and proves that in the case of a conventional project the rate of return is the IRR, while in the case of a non-conventional project it is the generalized internal rate of return (GIRR). The necessary and suffi cient conditions of conventional and non-conventional projects have been formulated.

Prior credit assessment of long-term SME projects with non-standard cash flows

“…Among the reasons leading to such a conclusion, there is one applied aspect related to the process of assessing the borrower's creditworthiness. In practical work, this assessment is complicated by the fact that the potential borrower has the nonstandard (unconventional) schedule of cash flows reserved for credit servicing (Kastro & Kulakov, 2016). It means that the projected cash flows proposed by the borrower are represented by the set of different-sized cash flows' values with uneven distribution over time but not the indiscrete series of the positive cash flows sufficient to service loan.…”

“…No indirect lender's preferences (4). The potential borrower's data analysis (2) shows that the loan complies with the necessary (3) but not the sufficient criterion (5) and the potential borrower is not ready to change the initial data (9). A bank experiences direct losses of value.…”

“…No indirect lender's preferences (4). The potential borrower's data analysis (2) shows that the loan complies with the necessary (3) and sufficient (5) criteria, but the preliminary evaluated credit terms ( 6) are unacceptable to the borrower (7), and the last one is not ready to change anything (9). A bank experiences direct losses of value.…”

Evaluation of Financial Instruments Possessing Non-Conventional Cash Flow

“…Depending on the type of project, the authors solve the equation NPV (r) = 0 and get two internal rates of return: the investment rate of return (IROR) and the borrowment rate of return (BROR). The authors do not consider "mixed" or non-conventional projects [Teichroew et al, 1965;Blaset Kastro and Kulakov, 2016] containing more than two cash flows and changing a sign more than once, because that would lead to the problem of the rate of return determination for non-conventional projects [Brealey et al, 2011;Brigham and Gapenski, 1996]. The problem of the IRR determination for non-conventional projects cannot be solved within the bounds of the NPV method because the NPV method uses a single discount rate.…”