Investment decisions and sensitivity analysis: NPV-consistency of rates of return

Abstract

Investment decisions may be evaluated via several different metrics/criteria, which are functions of a vector of value drivers. The economic significance and the reliability of a metric depend on its compatibility with the Net Present Value (NPV). Traditionally, a metric is said to be NPV-consistent if it is coherent with NPV in signalling value creation. This paper makes use of Sensitivity Analysis (SA) for measuring coherence between rates of return and NPV. In particular, it introduces a new, stronger definition of NPV-consistency that takes into account the influence of value drivers on the metric output. A metric is strongly NPV-consistent if it signals value creation and the ranking of the value drivers in terms of impact on the output is the same as that provided by the NPV. The degree of (in)coherence is calculated with Spearman's (1904) correlation coefficient and Iman and Conover's (1987) top-down coefficient. We focus on the class of AIRRs (Magni 2010, 2013) and show that the average Return On Investment (ROI) enjoys strong NPV-consistency under several (possibly all) methods of Sensitivity Analysis.

Private vehicle-based crowdshipping for intercity express transportation: Feasibility assessment

“…Magni's 37,38 research indicated that the effects of using AIRR and NPV were the same, that is, any decision made by an investor using NPV was the same as a decision made by an investor using AIRR. As NPV is considered to be the most reliable tool in theory, [39][40][41] this study will also use NPV as an indicator to predict the potential economic benefits of carrying out crowdshipping program.…”

Debt to Equity Levels in Polish Nonprofit Organisations

“…Woronkowicz (2016) uses data for a sample of non-profit entities and models the relationship between financial vulnerability indicators and facilities investments. The findings of Marchioni and Magni (2018) and Woronkowicz (2016) are evidence of the fact that investments in facilities are associated with the costs of debt associated with facilities projects and influence non-profit finances. Woronkowicz's findings have implications for the financial management of non-profit entities costs of capital (Woronkowicz, 2016).…”

“…Long (1976) found that debt to equity decisions must be based on many inputs, including financial valuation, which has not been traditionally applied in the non-profits sector. Reiter et al (2000) claim that decisions about capital structure in non-profits have the same rules as in for-profit entities (Zietlow, 2010;Marchioni & Magni, 2018).…”

Embedding environment and sustainability into corporate financial decision‐making

“…While the ROI metric has utility, return is an accounting measure that fails to incorporate both the risk or timing of future payoffs. NPV is based on the discounted cash flow (DCF) model, which is one of the most common models used in the financial world (Brealey et al, 2014;Marchioni and Magni, 2018). Only projects with a positive NPV should be undertaken (Moyer et al, 2017) as they should create shareholder value (Brav et al, 2005).…”