Reinvestment Bias When Analyzing Mutually Exclusive Assets

Capital budgeting decisions generally involve the commitment of resources in the current period to secure positive cash flows over time that generate a rate of return in excess of the cost of the funds invested. The most common techniques used to perform this analysis are the Net Present Value (NPV) and the Internal Rate of Return (IRR).Conceptually, these two techniques are substitutable; i.e. the resulting decision from a NPV analysis is identical to the decision from an IRR analysis. In practice, however, the NPV and the IRR can, on occasion, produce conflicting decisions. Specifically, when analyzing mutually exclusive assets the Net Present Value can support one asset while the Internal Rate of Return supports the other. The purpose of this paper is twofold; first, to highlight structural deficiencies in the conventional application of the NPV and the IRR, and second, to demonstrate a procedure to correct for these structural errors.

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Mutually exclusive capital projects: A critique of Fisherian analysis

South African Journal of Business Management ◽

10.4102/sajbm.v25i1.841 ◽

1994 ◽

Vol 25 (1) ◽

pp. 47-51

Author(s):

S. Paulo

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Cash Flows ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Rates Of Return ◽

Capital Projects ◽

Internal Rate ◽

Project Life

In capital budgeting a Fisherian analysis is undertaken to resolve conflicts in rankings which arise when mutually exclusive projects have been evaluated according to the net present value and internal rate of return criteria. Within the literature, the projects which have been subjected to a Fisherian analysis, all have the same required rates of return because the required rate of return is held constant irrespective of the differences in the characteristics of the mutually exclusive projects. The conflict in rankings of mutually exclusive projects is typically ascribed to characteristics such as differences in initial outlay and project life span, disparities in the timing of cash flows, the reinvestment rate assumption, and the difficulties of multiple or no unique internal rate of return when the cash flows are non-conventional. Despite these differences among projects, the same required rate of return is used. The central question which is addressed in this article, is whether the same required rate of return can reasonably be used for the valuation of each of the mutually exclusive projects, as well as when a choice is made from among the mutually exclusive projects. In the discussion this 'conventional wisdom' of a constant required rate of return for both the valuations and the choice of an alternative is questioned, and it is suggested that one of the causes of a conflict in rankings may be the use of incorrectly specified required rates of return. Also presented in this article is a conceptual framework which enables a modified Fisherian analysis.

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Evaluation of Investment Projects: A Case from Turkish Cement Sector

International Conference on Eurasian Economies 2016 ◽

10.36880/c07.01587 ◽

2016 ◽

Author(s):

Miyase Karabulut ◽

Sıtkı Sönmezer ◽

Vedat Zeki Yenen ◽

Zeynep Emir

Keyword(s):

Qualitative Research ◽

Net Present Value ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Investment Projects ◽

Preliminary Results ◽

Internal Rate ◽

Exclusive Or

Capital budgeting is crucial for firms that have projects to evaluate especially when the projects are mutually exclusive or financing is scarce. The aim of the study is to determining the most widely used methodologies in capital budgeting decisions and their effectiveness. A qualitative research will provide cement sector specific examples in assessing industry projects and compares the methods of Net Present Value, İnternal rate of Return, Pay-back period, discounted pay-back period and MIRR. Each method is briefly discussed and its drawbacks and advantages are mentioned in detail. Other sectors are also examined in terms of capital budgeting. Our preliminary results indicate that net present value method dominates capital budgeting decisions in the sectors under study.

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Risk Manage Capital Investment Decisions: A Lease vs. Purchase Illustration

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v25i3.1031 ◽

2011 ◽

Vol 25 (3) ◽

Author(s):

Thomas L. Zeller ◽

Brian B. Stanko

Keyword(s):

Capital Investment ◽

Net Present Value ◽

Investment Decisions ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Wealth Creation ◽

Font Size ◽

Present Value ◽

Internal Rate

This paper demonstrates how to build risk into capital investment decisions.  We illustrate how to combine distribution theory, technology, and a business professional’s skills and insight into a capital investment analysis.  In addition, we show how management can approximate the risk of each cash flow estimate and display the overall capital investment results.  This framework is extended by showing how a mutually exclusive decision can be improved, using a lease versus purchase example.<a style="mso-footnote-id: ftn1;" name="_ftnref1" href="http://journals.cluteonline.com/index.php/JABR/author/saveSubmit/#_ftn1">[1]</a>  An Excel template is readily available from the authors allowing a hands-on application of the framework presented in this paper.  In addition, this paper positions the reader to comfortably use more advanced analytics, such as Monte Carlo simulation, a tool that is readily available in commercial software applications.<div style="mso-element: footnote-list;"> <hr size="1" /><div id="ftn1" style="mso-element: footnote;">This paper focuses on the application of net present value.  The advantage of using net present value in a capital budgeting decision is that it shows the potential stakeholder wealth creation and wealth destruction.  An internal rate of return analysis is intentionally left out of this paper.  According to Brealey, Myers and Allen, Principles of Corporate Finance, New York, NY: McGraw-Hill/Irwin 2006, pp. 91-99, internal rate of return should not be used to evaluate mutually exclusive capital investments.  </div></div>

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B. ANALISA KELAYAKAN BISNIS PADA USAHA SWEETIN

Inovasi Manajemen dan Kebijakan Publik ◽

10.54980/imkp.v4i1.115 ◽

2021 ◽

Vol 4 (1) ◽

pp. 11

Author(s):

Vivi Indah Yani ◽

Rachmat Mustofa Pratama ◽

Izza Islami ◽

Iman Supriadi

Keyword(s):

Net Present Value ◽

Cost Of Capital ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

The Cost ◽

Business Study

Abstrak Tujuan dari penelitian ini adalah untuk menganalisis dan mendeskripsikan studi kelayakan bisnis yang dilakukan pada Kewirausahaan “Sweetin” yaitu usaha yang baru dirintis di Surabaya dalam bidang makanan (dessert). Penelitian ini menggunakan metode Net Present Value (NPV), Internal Rate of Return (IRR) dan Payback Period (PP). Hasil yang diperoleh dalam penelitian ini yaitu nilai NPV sebesar Rp. 1.910.819 > dari nol. Nilai IRR sebesar 110% > dari cost of capital 10%. Dan PP 1 bulan. Hal ini berarti kewirausahaan Sweetin ini menunjukkan bahwa secara non-finansial dan finansial layak untuk dijalankan. Kata kunci: Kelayakan Usaha, Non-Finansial, Finansial Abstract The purpose of this research is to analyze and describe the business study conducted on “Sweetin” Entrepreneurship, a business that has just been pioneered in Surabaya in the field of food (dessert). This study uses the method of Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period (PP). The results obtained in this study are the NPV value of Rp. 1,910,819> from zero. The IRR value is 110%> 10% of the cost of capital. And 1month PP. This means that Sweetin's entrepreneurship shows that it is non-financially and financially feasible to run. Keywords: Business Feasibility, Non-financial, Financial

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Analisis Kelayakan Pengembangan Usaha Pasta Kangen Jupiter dan Mogot Jakarta Barat dengan Menggunakan Metode Capital Budgeting Tahun 2019-2023

Reviu Akuntansi, Manajemen, dan Bisnis ◽

10.35912/rambis.v1i1.401 ◽

2021 ◽

Vol 1 (1) ◽

pp. 9-14

Author(s):

Ni Puthu Eka Wardani Haliasih ◽

◽

Pambuko Naryoto ◽

Keyword(s):

Research Methodology ◽

Net Present Value ◽

Average Rate ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Abstract Purpose: This study aimed to determine the feasibility of establishing the Pasta Kangen Jupiter dan Mogot Jakarta Barat in West Jakarta. Research methodology: The assessment is reviewed with Capital Budgeting in Optimistic, Moderate, and Pessimistic versions. Several methods include Payback Period, Net Present Value, Profitability Index, Average Rate of Return, Internal Rate of Return, dan Discounted Payback Period. Results: Based on the results of calculations using the Optimistic and Moderate Version of Capital Budgeting method, Pasta Kangen Jupiter Daan Mogot Jakarta Barat business in West Jakarta is feasible to run, while the Pessimistic Version is not feasible to run.

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Analisa Kelayakan Capital Budgeting Jaringan Backbone Kabel Serat Optik Palapa Ring Studi Kasus : Palapa Ring Barat

Jurnal Telekomunikasi dan Komputer ◽

10.22441/incomtech.v9i2.6472 ◽

2019 ◽

Vol 9 (2) ◽

pp. 87

Author(s):

Nurwan Reza Fachrurrozi

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Dalam rangka masyarakat Indonesia yang modern dan berbasis informasi, pemerintah bekerjasama dengan beberapa perusahaan telekomunikasi swasta menggelar mega-proyek pembangunan jaringan infrastruktur telekomunikasi berupa jaringan backbone kabel serat optik berkecepatan tinggi yang dinamakan Palapa Ring. Tujuan Palapa Ring antara lain untuk mengurangi kesenjangan digital antara Indonesia Bagian Barat & Indonesia Bagian Timur serta menyediakan akses telekomunikasi bagi masyarakat dengan tujuan pemerataan akses informasi untuk meningkatkan kesejahteraan dan mengurangi kemiskinan. Dalam perancangan jaringan ekstensi, parameter diatas ditambah lagi dengan proyeksi kapasitas jaringan yang dibutuhkan untuk beberapa tahun kedepan. Landing Stations ini terdiri dari 12 Kota Pantai beserta analisa penempatannya yang tidak semuanya sama dengan rekomendasi KMI. Untuk proyeksi kebutuhan kapasitas, didapatkan angka kebutuhan kapasitas untuk masing-masing Landing Stations sampai tahun 2033. Penelitian ini bertujuan untuk menganalisa kelayakan dari rencana investasi yang akan dilaksanakan PT. XXX. Rencana investasi ini berupa pembangunan proyek Palapa Ring Barat dengan total investasi sebesar Rp. 1,000,000,000,000 dengan tingkat bunga sebesar 18% & 30%. Dengan alat analisis Payback Period, Discounted Payback Period, Net Present Value, dan Internal Rate Of Return. Tiga alat analisis tersebut dipakai juga oleh PT. XXX untuk mengukur layak atau tidaknya proyek tersebut. Dari hasil analisis dan rencana proyek Palapa Ring Barat diperoleh Payback Period (PP) 3 tahun 1 bulan dan Discounted Payback Period 4 tahun 5 bulan dari target PT. XXX yaitu 15 tahun, Net Present Value (NPV) Rp. 1,392,644,795,000 dari target yang di tentukan PT. XXX yang hasilnya positif, Internal Rate Of Return (IRR) 35 % dari 18 % & 30 % yang di targetkan oleh PT. XXX. Dan juga didapatkan hasil Subsidi KPBU dari pemerintah Rp. 1,490,772,000,000 dengan rincian simulasi pembayaran selama 15 Tahun dengan Interest 0 % sebesar Rp. 99,384,800,000 / Tahun.

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Methodical approaches to the assessment of investment attractiveness of agricultural enterprises

Scientific Messenger of LNU of Veterinary Medicine and Biotechnologies ◽

10.32718/nvlvet-e9313 ◽

2019 ◽

Vol 21 (93) ◽

pp. 63-69

Author(s):

R. M. Myniv

Keyword(s):

Cash Flow ◽

Net Present Value ◽

Cash Flows ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Investment Projects ◽

Agricultural Enterprises ◽

Internal Rate ◽

Dynamic Methods

Evaluation of investment efficiency is central to the process of justifying and selecting possible options for investing in investment projects, and is therefore a key to successful implementation of investment activities of agricultural enterprises. The main directions of financing of investment projects of agricultural enterprises are: purchase or construction of unfinished construction objects, new construction, expansion of existing enterprises, reconstruction of existing enterprises and technical re-equipment of existing enterprises. Two main groups of methods of assessing the cost-effectiveness of investment projects have become most widespread: static and dynamic. Static methods involve the calculation of indicators based on undiscounted cash flows. Dynamic methods, on the contrary, take into account the change in the value of money over time and imply bringing the values of all cash flows to the same period by discounting or compounding. Dynamic methods for assessing the effectiveness of investment projects include the following basic methods that rely on most modern Ukrainian enterprises, such as net present value cash flow (NPV), internal rate of return (IRR), payback period (DPP) and project profitability index (PI). On their basis the basic methods of selection of investment projects of agricultural enterprises are formed. Net Present Value (NPV) calculation. is based on comparing what will be invested in the future with what is invested now. The Profitabale Index (PI) is directly related to net present value and is defined as the ratio of the discounted cash flow to initial investment. The IRR (Internal Rate of Return) is the discount rate at which the projected cash inflows are equal to the project's discounted cash flows. As indicators of the effect in calculating the overall efficiency of investments, it is advisable to use changes in the following values of growth: revenue from the sale of enterprise products; gross income; profit before tax; net profit; cash flow; clean products. Gross and net investment should be included in the costs. The use of qualitative methods in investment analysis is due to the following reasons: the subjectivity of the phenomena or characteristics studied; lack or lack of necessary information; inability to analyze objective and acceptable methods; lack of research object (to be created during project implementation). Quantitative methods for evaluating agricultural investment projects include methods of probability theory and mathematical statistics, as well as economic and statistical methods.

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ANALISIS CAPITAL BUDGETING TERHADAP KELAYAKAN INVESTASI AKTIVA TETAP PADA PT. KHARISMA ARTA ABADI GUNA LUWUK KABUPATEN BANGGAI

Jurnal Ilmiah Manajemen E M O R ◽

10.32529/emor.v2i1.190 ◽

2019 ◽

Vol 2 (1) ◽

pp. 70

Author(s):

Irwan Moridu ◽

Sitti Damayanti Adista

Keyword(s):

Net Present Value ◽

Average Rate ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate

Tujuan yang ingin dicapai dengan diadakannya penelitian ini adalah untuk menganalisis kelayakan rencana investasi asset tetap yang berupa penggantian mesin baru pada PT. Kharisma abadi arta guna luwuk. Adapun teknik yang digunakan dalam penelitian ini adalah deskriptif sedangkan pendekatan yang digunakan adalan kuantitatif, analisis data menggunakan laporan arus kas untuk menghitung Payback Period,Average Rate Of Return,Net Present Value, Profitability index,Internal Rate Of Return. Dari hasil analisis data diperoleh hasil bahwa untuk PP 1 tahun 9 bulan sehingga proyek di terima, untuk ARR dieroleh nilai 51,84%>25% maka proyek investasi diterima,untuk NPV diperoleh nilai positif Rp. 3.825.223.229 maka proyek diterima, dan untuk PI diperoleh nilai 3,5>1 maka investasi layak dilaksanakan. Dari penelitian yang telah dilakukan untuk mengantisipasi kerugian-kerugian yang tidak diharapkan oleh pihak PT. Kharisma Abadi Arta Guna harus melakukan analisis kelayakan investasi sebelum melakukan investasi , agar dapat mengurangi resiko yang terjadi.

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PERENCANAAN PENGHEMATAN ENERGI DENGAN SISTEM KOGENERASI / COMBINE HEAT AND POWER (CHP) CAPSTONE MICROTURBINE C-30 DI PT DUA KELINCI

Simetris Jurnal Teknik Mesin Elektro dan Ilmu Komputer ◽

10.24176/simet.v7i2.760 ◽

2016 ◽

Vol 7 (2) ◽

pp. 495

Author(s):

Imam Abdul Rozaq ◽

Noor Yulita Dwi Setyaningsih

Keyword(s):

Net Present Value ◽

Capital Budgeting ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

C 30

PT Dua Kelinci adalah salah satu industri makanan yang terbesar di Pati yang memiliki daya listrik sebesar 4950 kVA. PT Dua Kelinci perlu melakukan penghematan energi, salah satunya dengan kogenerasi (penggabungan antara listrik dan panas). Penelitian ini dimulai dari pengambilan data berupa kebutuhan listrik dan panas pada proses pembuatan kacang telur menggunakan teknologi kogenerasi Capstone Microturbine C-30 di PT Dua Kelinci. Metode penelitian yang digunakan meliputi analisis teknis dan analisis lingkungan Dari hasil analisis dihasilkan bahwa asumsi pada kondisi awal harus membayar biaya listrik dan panas sebesar Rp 959.784.664,00 sedangkan dengan menggunakan kogenerasi hanya membayar Rp 774.499.669,00 pertahun. Jadi penghematan total sebesar Rp 185.284.995,00 per tahun. Kelebihan penjualan listrik sebesar 103.680 kW (Rp 101.088.000,00), kelebihan penjualan panas sebesar 4,075 TJ/tahun (Rp 255.085.220,00), dan perdagangan emisi gas rumah kaca sebesar 130,88 tonCO2 (Rp 10.470.800,00) yang dapat diasumsikan seperti menanam pohon sebanyak 29 hektar pepohonan. Setelah dilakukan perhitungan Analisis Capital Budgeting diperoleh NPV (Net Present Value) sebesar Rp 107.058.448,00 dan IRR (Internal Rate of Return) sebesar 12,75 % serta PBP (Pay Back Periode) 5,18 tahun sehingga proyek penerapan sistem kogenerasi dengan menggunakan Capstone Microturbine C-30 layak diterima karena nilai NPV lebih besar dari nol dan nilai IRR lebih besar dari tingkat suku bunga bank serta PBP yang dihasilkan sebesar 5,18 tahun. Kata kunci: energi, kogenerasi, capstone microturbine.

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Aplikasi Capital Budgeting dalam Penentuan Keputusan Investasi Kamar dan Ballroom Di Hotel Panorama Lembang

Jurnal Kepariwisataan: Destinasi, Hospitalitas dan Perjalanan ◽

10.34013/jk.v2i1.17 ◽

2018 ◽

Vol 2 (1) ◽

pp. 10-20

Author(s):

Wishnu Wardhana

Keyword(s):

Time Series ◽

Positive Result ◽

Net Present Value ◽

Capital Budgeting ◽

Payback Period ◽

Rate Of Return ◽

Internal Rate Of Return ◽

Present Value ◽

Internal Rate ◽

Forecasting Methods

This research's title is "Applications of Capital Budgeting Method in Feasibility Study of Rooms and Ballroom Investment at Hotel Panorama Lembang", the purpose of this research are to know the feasibility of hotel investment based on financial projection aspect which using Capital Budgeting Method at Hotel Panorama Lembang. The feasibility of investment evaluate by the tools of capital budgeting model, which is have aspect of Discounted Payback Period, Net Present Value, Internal Rate Of Return, and Profitability Index in Hotel Panorama Lembang. The results of this research from the financial projection evaluated with the tools of capital budgeting evaluation which have the results can be seen that investment is feasible, as calculated by the method of discounted payback period is 8 years and 2 months based on hotel evaluation and 6 years and 11 months based on writer's evaluation, net present value in positive result (NPV > 0) in the amount of Rp. 1.743.693.325 , Internal Rate of Return is higher than the discounted factor of 12% in the amount of 23.9303%, profitability index is in positive result higher than 1. Based upon this calculation summarised that the feasibilty of investment based on financial projection are accepted. Based on the evaluation from the capital budgeting method, the criteria of investment at Hotel Panorama Lembang are accepted. The management used the methods which doesn't improve a good result in feasibility. Methods that used by the author more improve a good result in investing decisions, because using a selection of forecasting methods for future revenues. The author used a time series forecasting methods to improve more revenues for hotel. This forecasting method can provide the closest forecast result and the highest rate of accuracy. The author recommends to the management of Panorama Hotel Lembang to continue and accepted the investment of new rooms and ballroom. Considering the result of a feasebility study with a capital budgeting methods are accepted. The author also recommends to the management of Panorama Hotel Lembang to use a proper forecasting methods, such as time series methods.

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