IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investment Projects

Arjunan, Kannapiran C.

doi:10.2139/ssrn.2913905

Cited by 14 publications

(11 citation statements)

References 20 publications

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“…Such an income from reinvestment is not an income flow from the investment as required under the DCF and CAS methods. Interest income should not be included as project benefit stream. Any sinking fund created to pay‐off any expected future capital expenditure or losses is a function of funds operation not a part of the internal rate of return of the investment project (some authors call it as external rate of return (see Crean, ; Cheremushkin, ; Kierulff, ; Arjunan, ). Finally, two basic principles are satisfied: (i) the NNCFs are fully utilised at all multiple IRRs and therefore the CBs in all the cases are zero. The rate of returns must be feasible with a given NCF or the NCF could support such rates (NCF consistent); at 10 per cent discount rate, the closing balance is negative 171 and therefore the NNCF is not enough to support 10 per cent rate; and (ii) the mathematical relationship between NPV and IRR are consistent that is at IRR, NPV = 0 for all three IRRs.…”

Section: Resultsmentioning

confidence: 99%

“…Arjunan (,b, ) and Arjunan and Kannapiran () conducted detailed numerical analyses, specifically focusing on the problems discussed in Section above, and concluded: (i) NNCF is a data problem that affects both NPV and IRR; (ii) neither MIRR nor NPV rule could solve the problems associated with multiple IRR; (iii) reinvestment of intermediate income is common with NNCF and some normal NCF; and (iv) IRR, estimated by the CAS or modified capital amortisation (MCAS) method, can resolve the data problems for independent and mutually exclusive projects.…”

Section: Literaturementioning

confidence: 99%

“…Interest income should not be included as project benefit stream. 4 Any sinking fund created to pay-off any expected future capital expenditure or losses is a function of funds operation not a part of the internal rate of return of the investment project (some authors call it as external rate of return (see Crean, 2005;Cheremushkin, 2012;Kierulff, 2008;Arjunan, 2017b). 5 Finally, two basic principles are satisfied: (i) the NNCFs are fully utilised at all multiple IRRs and therefore the CBs in all the cases are zero.…”

Section: Factors Causing Non-monotonic Npv Function and Multiple Irr mentioning

confidence: 99%

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Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems

Arjunan¹

2019

J of App Econs and Policy

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The causes and effects of non‐monotonic NPV functions are evaluated and the results presented in this paper. Reinvestment of intermediate income causes non‐monotonic NPV function. Non‐monotonic NPV function not only leads to multiple IRRs but also to spurious NPVs. The capital amortisation (CAS) method used in this analysis transparently reveals if there is any reinvestment. A modified CAS method, discussed in this paper, eliminates the reinvestment and resolves the problems of non‐monotonic NPV function, reinvestment, spurious NPVs and multiple IRR. The current practice of using NPV as the preferred criterion, when there are multiple IRRs, is not appropriate.

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Section: Resultsmentioning

confidence: 99%

Section: Literaturementioning

confidence: 99%

Section: Factors Causing Non-monotonic Npv Function and Multiple Irr mentioning

confidence: 99%

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Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems

Arjunan¹

2019

J of App Econs and Policy

Self Cite

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“…The economic indicator of the internal rate of return (IRR) has been employed as the initial economic performance indicator [50]. This is because it is now well established that for mutually exclusive and independent projects the utilization of the calculated IRR value constitutes the most reliable screening/ranking tool [51]. Thus, in the present study, the project characterized by the higher IRR value will be considered as the more primary economic screening parameter.…”

Section: Economic Assessment Methodsmentioning

confidence: 99%

Comparative Assessment of Thermo-Syngas Fermentative and Liquefaction Technologies as Waste Plastics Repurposing Strategies

Okoro

Faloye

2020

AgriEngineering

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The present study comparatively investigates the potential of waste plastic utilization as a feedstock for the production of liquid fuels to satisfy the rising liquid fuel demands of the transportation industry while simultaneously resolving the global plastic waste pollution challenge. For the first time, therefore, conceptual models simulating the production of transportation fuels of ethanol and gasoline from waste plastics via the technologies of thermo-syngas fermentation and hydrothermal liquefaction were assessed using classic technoeconomic assessment methods. The conceptual models were developed based on existing experimental data as obtained from the literature and simulated using ASPEN Plus as the preferred process simulation tool. This study demonstrated the technical viability of both conversion pathways with the hydrothermal liquefaction (HTL) of waste plastics for gasoline production shown to constitute a more economically preferable pathway. This was because the HTL of waste plastics presented a higher internal rate of return (IRR) value and a lower unit processing cost of 51.3% and USD 0.38 per kg compared to the thermo-syngas fermentation pathway that presented an IRR value and a unit processing cost value of 22.2% and USD 0.42 per kg, respectively. Payback periods of 5 years and 2 years were also determined as vital to recoup initial capital invested in the thermo-syngas fermentation project and the HTL project, respectively. Therefore, this study provides a basis for further work regarding waste plastic management strategies while offering a useful guide for policy makers in determining the most cost-effective way to utilize waste plastic and thus promote favorable environmental outcomes.

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“…Discounted cash flows were evaluated for a 30 y project lifecycle with annual cash flow from assets (NRevs) incorporating product sales i.e., products of electricity and heat, energy-dense oil product, and ethanol (pre-COVID-19 selling prices utilised) in scenario i, scenario ii, and scenario iii, after subtracting the operating cost and income tax. Therefore, the NPV for each scenario was calculated using Equation (3) [37][38][39];…”

Section: Economic Performance Measurementioning

confidence: 99%

Circumventing Unintended Impacts of Waste N95 Facemask Generated during the COVID-19 Pandemic: A Conceptual Design Approach

2020

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The global crisis arising from the current COVID-19 pandemic has resulted in a surge in the magnitude of global waste from used Personal Protective Equipment with special emphasis on waste N95 facemask. Creative approaches are therefore required to resolve the surging facemask waste disposal issue in an economical and environmentally friendly manner. In an attempt to resolve the evolving global waste challenge, the present study has assessed the economic and environmental performances of converting N95 facemasks to steam and electricity via a combined heat and power plant, to ethanol via a syngas fermentation process, and to an energy-dense gasoline-like oil product via a hydrothermal liquefaction process. These processes were assessed using “conceptual” process models developed using ASPEN plus as the process simulation tool. Economic and environment assessments were undertaken using net present values (NPVs) and the rate of potential environmental impacts (PEIs) respectively, as sufficient performance measures. Therefore, the present study was able to establish that the conversion of waste N95 facemask to syngas prior to a fermentation process for ethanol production constituted the least economical and least environmental friendly process with a negative NPV and the highest rate of PEI (1.59 PEI/h) value calculated. The NPV values calculated for N95 facemask waste conversion to steam and electricity and energy-dense oil processes were US$ 36.6 × 106 and US$ 53 × 106 respectively, suggesting the preference for the production of a valuable energy-dense oil product. Furthermore, it was observed that when the environmental performance of both processes was considered, rates of PEIs of 1.20 and 0.28 PEI/h were estimated for the energy-dense oil production process and the steam and electricity generation process, respectively. Therefore, the study was able to establish that the utilisation of waste N95 facemask for steam and electricity generation and for generating an energy-dense oil product are both promising approaches that could aid in the resolution of the waste issue if both environmental and economic performances constitute crucial considerations.

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IRR Performs Better than NPV: A Critical Analysis of Cases of Multiple IRR and Mutually Exclusive and Independent Investment Projects

Cited by 14 publications

References 20 publications

Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems

Non‐monotonic NPV Function Leads to Spurious NPVs and Multiple IRR Problems: A New Method that Resolves these Problems

Comparative Assessment of Thermo-Syngas Fermentative and Liquefaction Technologies as Waste Plastics Repurposing Strategies

Circumventing Unintended Impacts of Waste N95 Facemask Generated during the COVID-19 Pandemic: A Conceptual Design Approach

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