یادداشت فنی: تعادل از معیارهای سودآوری مختلف با ارزش خالص فعلی
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|22490||2013||6 صفحه PDF||سفارش دهید||4170 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : International Journal of Production Economics, Volume 142, Issue 1, March 2013, Pages 205–210
Net present value has long been regarded in academic circles as the best criterion for project appraisal; however, several alternative, complementary methods remain popular with practitioners. This paper demonstrates that, if properly applied, several of these standard criteria – such as net final value, internal rate of return, benefit–cost ratio, profitability index, equivalent annuity, discounted payback period and average payback period – lead to the same investment decision as net present value. Moreover, the paper proves that when choosing between two mutually exclusive projects, the application of these criteria to the difference project provides the same ranking as net present value. Therefore, although net present value is regarded as a superior investment criterion, any of these popular criteria, properly applied, serve as well.
Several authors expose the merits and limitations of the different profitability criteria applied to project appraisal (e.g., Remer and Nieto, 1995a, Remer and Nieto, 1995b, Karibskii et al., 2003 and Godinho et al., 2004). The net present value (NPV) criterion is generally considered superior and is widely used, especially by large firms (Graham and Harvey, 2001 and Brounen et al., 2004). It is even employed as a basis for the incorporation of new variables such as uncertainty in project valuation (De Reyck et al., 2008). Meanwhile, for the other criteria, such as the very popular internal rate of return (IRR), the main criticism is their lack of equivalence with NPV (e.g., Ross, 1995, Oehmke, 2000, Magni, 2010 and Chiang et al., 2010). However, in spite of persistent criticism in academic circles, IRR as well as other alternative and complementary criteria (e.g., payback period, PB, or benefit–cost ratio, BCR) are still very popular among practitioners (Remer et al., 1993 and Ryan and Ryan, 2002). It is therefore essential to demonstrate whether the application of these widely used criteria is consistent with NPV, the theoretically correct criterion. One of the first problems leading to the rejection of a criterion is that it may give a different response to NPV for the desirability of a project. Several authors (e.g., Hirshleifer, 1958 and Rosen, 2008) highlight the issue of potential multiple IRRs for a given project, pointing out that in such a case, this criterion does not provide an adequate solution. Some authors have tried to address this question by establishing an application rule for the IRR criterion in order to obtain an equivalent evaluation to that obtained with NPV. Hazen, 2003 and Hazen, 2009 states that in the case of multiple (even complex) internal rates of return, each can meaningfully be interpreted as a rate of return on its own underlying investment stream (sequence of capitals periodically invested in the project). Irrespective of which rate is used, once the underlying investment stream is identified as net investment or net borrowing, the decision is consistent with NPV. Pasqual et al., 2001 and Pasqual et al., 2005 demonstrate that the alleged conflict between NPV and IRR on the profitability of a project can easily be overcome by considering the characteristics of the NPV function and gives appropriate definition of what investments and loans (borrowing decisions) are. The authors show that all the real IRRs make sense from an economic standpoint and that when there is at least one real IRR, both IRR and NPV lead to the same recommendations (see Section 2.3 below). Their method does not require the transformation of cash flow streams. Using the same conceptual framework, Hartman and Schafrik (2004) independently derive the same basic results: if there is at least one real IRR, NPV and IRR always coincide in their recommendations on the desirability of a project. Later, Zhang (2005) examines the same problem and proposes a method that focuses on the parity of the number of real IRRs that are greater than the cost of capital, so that the decision rule is consistent with NPV. More recently, Magni (2010), who provides a comprehensive review of the relevant literature, suggests the use of the average internal rate of return (AIRR) as an alternative to IRR. The author defines AIRR as an average of one-period return rates derived from investment streams that are freely chosen by the analyst. The criterion then compares the AIRR with the market rate. The AIRR method is fairly successful at obtaining a criterion expressed as a rate of return that is consistent with NPV. Additionally, it overcomes the problem of the non-existence of real IRRs by providing a real-valued measure that can also be applied to both gifts and losses. Pierru (2010) provides an interpretation of complex rates of return in project appraisal. He states that a series of real rates of return can be associated with any complex rate of return. His proposed alternative makes it possible to discount at a single (but complex) rate the cash flow of an investment involving the joint production of two outputs, the markets of which have different risks. Finally, Osborne (2010) considers all the different rates (real and complex) and shows that the NPV per dollar invested is composed of all multiplicative mark-ups of every IRR over the cost of capital. Osborne (2010, p. 237) contends that “every IRR is equally important, because NPV is composed of them all”. The pitfall of different IRRs is not viewed as a problem by Osborne as all of them provide information contained in the NPV function. Also, the ranking provided by considering all possible IRRs would be identical to that availed by the NPV per dollar invested. According to Osborne, the IRR is not a criterion per se but rather a component of the NPV criterion that provides partial information. This paper contributes to the existing literature by extending to other criteria the above cited contributions on the equivalence between NPV and real IRRs for deciding on project desirability. In short, we will demonstrate the equivalence with NPV for other fairly popular criteria: net final value (NFV), benefit–cost ratio (BCR), profitability index (PI), equivalent annuity (EA), discounted payback period (PB) and average payback (APB) (a new criterion with broader scope of application than PB). We find, given that these are widely used methods, that it is of major relevance to determine whether their application, whenever possible, is equivalent to applying NPV. A second problem that can cause a criterion to be considered inappropriate is the possibility of a ranking of mutually exclusive projects different from the one suggested by the NPV criterion. This is the case with IRR and BCR, among others. The solution to this problem is intuitively offered in, inter alia, Gittinger (1984), Brent (1998), Newnan et al. (2011), Zerbe and Bellas (2006) and Brealey et al. (2011). These authors claim that the appropriate way of choosing between exclusive projects with the IRR criterion is to apply it to the difference project. Unfortunately, none of them provides any formal demonstration and they limit their recommendation to the IRR criterion. An exception is Magni (2011), who shows that the application of AIRR to the difference project leads to a ranking consistent with NPV. In this paper, we demonstrate that the application of IRR to the difference project is always consistent with NPV and we extend this result to all the criteria that are equivalent to NPV. So, it would also be appropriate to use them to rank mutually exclusive projects.
نتیجه گیری انگلیسی
In this paper, we have demonstrated that several standard criteria, some of which are very popular among practitioners, are consistent with NPV, contrary to what is stated in part of the specialised literature. This is the case with IRR, as the alleged problems caused by the multiplicity of real IRRs do not invalidate the criterion if adequately interpreted and implemented. The same equivalence is found for other criteria such as NFV, BCR, PI, EA, PB and APB (a new criterion with broader scope than the traditional PB). The results are summarised in the theorem of equivalence with NPV: the application of any of the criteria analysed – NPV, NFV, IRR, BCR, PI, EA, PB and APB – to determine the desirability of a project, always leads to the same qualitative conclusion. Therefore, the use by practitioners of these criteria both to evaluate an investment and to complement the information provided by NPV is correct. This list is not exhaustive, and can be extended with additional consistent criteria. As to the problem of choosing between mutually exclusive projects, the paper showed that the theorem of equivalence with NPV can be extended to the case of the choice between two mutually exclusive projects, P and Q, if the criteria are applied to the difference project (P−Q). In other words, the application of any of the above mentioned criteria always leads to the same ranking of projects if the criterion is applied to the difference project. This result holds for all criteria whose application leads to the same results as NPV. Through this analysis, we do not cast any doubt on the theoretical superiority of NPV. In fact, from a practical point of view it is clearly more useful in some cases than several other options. This is true, for example, when there are no real IRRs (though the AIRR criterion proposed by Magni (2010) may also be employed in this case), or when evaluating gifts and losses for which BCR, PI, PB or APB would not be adequate. Thus, the contribution of this paper has been to make it clear that, as several of the widely used and most popular project appraisal criteria are consistent with NPV, the choice of the different criteria according to practitioners' preferences or to habits in practice would lead to equivalent recommendations.