The Weitzman Argument

2012 ◽  
Author(s):  
Christian Gollier
Keyword(s):  
Discount Rate ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Cash Flows ◽  
Simple Rule ◽  
Rate Of Return ◽  
Net Benefit ◽  
Investment Projects ◽  
Net Benefits

This chapter examines a model in which the exogeneous rate of return of capital is constant but random. Safe investment projects must be evaluated and implemented before this uncertainty can be fully revealed, i.e., before knowing the opportunity cost of capital. A simple rule of thumb in this context would be to compute the net present value (NPV) for each possible discount rate, and to implement the project if the expected NPV is positive. If the evaluator uses this approach, this is as if one would discount cash flows at a rate that is decreasing with maturity. This approach is implicitly based on the assumptions that the stakeholders are risk-neutral and transfer the net benefits of the project to an increase in immediate consumption. Opposite results prevail if one assumes that the net benefit is consumed at the maturity of the project.

scholarly journals The most appropriate discount rate

2013 ◽  
Vol 4 (03) ◽  
pp. 391-400 ◽  
Author(s):  
David F. Burgess ◽  
Richard O. Zerbe
Keyword(s):  
Private Sector ◽  
Discount Rate ◽  
Opportunity Cost ◽  
Time Preference ◽  
Cost Of Capital ◽  
Rate Of Return ◽  
Social Time ◽  
The Social ◽  
Benefits And Costs

The social opportunity cost of capital discount rate is the appropriate discount rate to use when evaluating government projects. It satisfies the fundamental rule that no project should be accepted that has a rate of return less than alternative available projects, and it ensures that worthy projects satisfy the potential Pareto test. The social time preference approach advocated by Moore et al. fails to satisfy either of these criteria even in the unlikely case that the private sector behaves myopically with respect to a project’s future benefits and costs.

scholarly journals Methodical approaches to the assessment of investment attractiveness of agricultural enterprises

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.

Introducing Investment Options

2021 ◽  
pp. 131-135
Author(s):  
Camilla Toulmin
Keyword(s):  
Decision Making ◽  
Opportunity Cost ◽  
Net Present Value ◽  
Cost Of Capital ◽  
Payback Period ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Risk And Uncertainty ◽  
Present Value ◽  
Over Time

This chapter offers a brief survey of how the investment literature deals with risk and uncertainty, and examines the reasons for variation in returns between farmers from the principal assets – wells, oxen plough-teams, breeding cattle. Simple decision-making models derive criteria for choosing between investment options according to the net present value, internal rate of return, and payback period associated with a given pattern of returns over time. Portfolio models presents the rationale for investment in a range of assets, the returns from which are poorly correlated. Farmers differ in terms of their access to factors of production, the scale of their activities, the opportunity cost of capital, and vulnerability to risk. Four idealised household types – A, B, C, D – are described in order to compare the flow of returns from the three principal investments – wells, oxen plough-teams, and breeding cattle.

scholarly journals The Problem of Determining Discount Rate for Integrated Investment Projects in the Oil and Gas Industry

Mathematics ◽  
2021 ◽  
Vol 9 (24) ◽  
pp. 3327
Author(s):  
Alexey Komzolov ◽  
Tatiana Kirichenko ◽  
Olga Kirichenko ◽  
Yulia Nazarova ◽  
Natalya Shcherbakova
Keyword(s):  
Discount Rate ◽  
Net Present Value ◽  
Oil And Gas ◽  
Oil And Gas Industry ◽  
Cash Flows ◽  
Practical Implementation ◽  
Gas Industry ◽  
Investment Projects ◽  
Integrated Project ◽  
Methodological Approaches

The main aim of this paper was to examine specific approaches to determining the discount rate for comprehensive computation of investment projects efficiency in the oil and gas industry. The objective of the study was to develop a scientific approach for determining the discount rate for integrated oil and gas projects. The authors analyze dynamic methods for determining the efficiency of investment projects in the oil and gas industry and conclude that they are advisable for oil and gas projects due to the high capital intensity of the projects and their long payback period. Regarding the need to implement dynamic indicators of efficiency, the authors set the task of deter-mining the proper discount rate as a factor having a significant impact on effectiveness evaluation. The discount rate is proposed to be evaluated by solving the equation and finding the break-even point where the NPV (net present value) of the integrated project will be equal to 0 (taking into account the revenue of the subprojects included in the complex). The practical implementation of methodological approaches to assessing the discount rate for integrated projects is relevant due to the execution of large, systemically important and integrated projects. As a result of the study, the authors put forward a methodological algorithm for determining the discount rate of an integrated project which assumes an assessment of cash flows for the subprojects included in the complex; determination of the target rate of return for subprojects; and calculation of prices for products at which a complex project become break-even. The practical implementation of methodological approaches to assessing the discount rate for integrated projects is relevant due to the execution of large systemically important integrated projects.

scholarly journals Analisis Kelayakan Finansial Agroindustri Cokelat Kota Palu (UKM Banua Cokelat)

2021 ◽  
Vol 28 (2) ◽  
pp. 186-196
Author(s):  
Ambo Abd. Kadir Pakanyamong ◽  
Effendy Effendy ◽  
Rustam Abdul Rauf
Keyword(s):  
Discount Rate ◽  
Net Present Value ◽  
Payback Period ◽  
Rate Of Return ◽  
Cost Ratio ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Net Benefit ◽  
Benefit Cost Ratio ◽  
Benefit Cost

Penelitian ini bertujuan untuk mengetahui analisis kelayakan finansial agroindustri Banua Cokelat. Penelitian ini dilaksanakan pada bulan November 2020 sampai dengan Februari 2021. Penentuan responden dilakukan secara sengaja (purposive). Hasil analisis kelayakan finansial agroindustri UKM Banua Cokelat  di peroleh nilai Net Present Value (NPV) lebih besar dari nol, yaitu sebesar RP 653.767.394, Net Benefit Cost Ratio (Net B/C) lebih besar dari satu yaitu sebesar 1.26,  Internal Rate of Return lebih besar dari discount rate  yaitu sebesar 19,7% dan Payback Period membutuhkan waktu selama 2 tahun 8 bulan untuk mengembalikan modal yang telah dikeluarkan dalam kegiatan investasi. Berdasarkan hasil analisis kelayakan finansial menunjukkan bahwa usaha ini layak untuk dilanjutkan atau dikembangkan.

scholarly journals Appropriate Discounting for Benefit-Cost Analysis

2011 ◽  
Vol 2 (2) ◽  
pp. 1-20 ◽  
Author(s):  
David F. Burgess ◽  
Richard O. Zerbe
Keyword(s):  
Cost Analysis ◽  
Discount Rate ◽  
Cost Of Capital ◽  
Hyperbolic Discounting ◽  
Ease Of Use ◽  
Benefit Cost Analysis ◽  
The Social ◽  
Net Benefits ◽  
Benefit Cost

In order to be sensible about what discount rate to use one must be clear about its purpose. We suggest that its purpose is to help select those projects that will contribute more net benefits than some other discount rate. This approach, which is after all the foundation for benefit-cost analysis, helps to reconcile different suggested procedures for determining the discount rate. We suggest that the social opportunity cost of capital (SOC) is superior to other suggested approaches in its generality and its ease of use. We use the SOC to determine a range of real rates that vary between 6% and 8%. We suggest that approaches based on determination of preferences, which result in hyperbolic discounting, are less appropriate and less useful.

scholarly journals Evaluation of Investment Projects: A Case from Turkish Cement Sector

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.

scholarly journals A STUDENT DORMITORY AS AN EDUCATIONAL SUPPORTING FACILITY: AN ENTERPRISE BUDGET ANALYSIS

2018 ◽  
Author(s):  
Etty Susilowati ◽  
Sugiharto Sugiharto ◽  
Leonnard Leonnard ◽  
Budi Srihartati
Keyword(s):  
Sensitivity Analysis ◽  
Net Present Value ◽  
Cash Flows ◽  
Primary Data ◽  
Cost Ratio ◽  
Net Benefit ◽  
Benefit Cost Ratio ◽  
Budget Analysis ◽  
Managerial Implications ◽  
Feasibility Test

The availability of student dormitories has become a major attraction for universities in Indonesia since many universities have provided this facility. In this study, we examine the potential of a student dormitory development at the Budi Luhur University, especially in terms of finance for student interests and education providers. Primary data were collected from 185 students and were analyzed by employing feasibility test of Net Present Value (NPV), Internal Rate of Return (IRR), Net Benefit Cost Ratio (Net B/C), Profitability Index (PI) and Pay Back Period (PP). Sensitivity analysis was also carried out both in terms of cost and income to anticipate the uncertainty that may occur. The findings indicated that the total investment required in the construction of the student dormitory was Rp 155,857,800 with an average revenue per annum of Rp 58,314,741,732. The results of the investment valuation analysis of net cash flows for 30 years indicated the NPV value of Rp 187,355,802,592, IRR of 21%, Net B/C of 10.57, PI of 2.20, and PBP 6.45 years. This proved that the investment in the student dormitory construction was considered feasible. Finally, from the sensitivity analysis of changes in occupancy rate, rental rates and operational costs, it was concluded that the investment in dormitory construction would be unfeasible when occupancy rates and rents were at the level of 80% down. Further managerial implications were discussed.

scholarly journals Reinvestment Bias When Analyzing Mutually Exclusive Assets

2011 ◽  
Vol 2 (3) ◽  
pp. 71
Author(s):  
Robert J. Sweeney
Keyword(s):  
Net Present Value ◽  
Capital Budgeting ◽  
Cash Flows ◽  
Rate Of Return ◽  
Internal Rate Of Return ◽  
Present Value ◽  
Internal Rate ◽  
Current Period ◽  
The Cost ◽  
Flows Over Time

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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