Ranking and Optimal Selection of Investments with Internal Rate of Return and Benefit-Cost Ratio: A Revision

Contaduría y Administración, No. 236, pp. 29-51, January-April 2012

24 Pages Posted: 18 Dec 2010 Last revised: 2 Jun 2013

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: December 16, 2010

Abstract

The purpose of this paper is to present a procedure to include the implicit assumptions of Net Present Value NPV in the Internal Rate of Return, IRR, and the profitability index (benefit-cost ratio B/CR). The resulting indicators are the weighted IRR (WIRR) and the expanded B/CR (EB/CR). These two desirability measures have the property to coincide with the NPV ranking for investment analysis and hence, will maximize value. Examples are presented.

Keywords: Net Present Value, NPV, Internal Rate of Return, IRR, Benefit–Cost Ratio, B/CR, Profitability Index, NPV Assumptions

JEL Classification: D92, E22, E31, G31

Suggested Citation

Velez-Pareja, Ignacio, Ranking and Optimal Selection of Investments with Internal Rate of Return and Benefit-Cost Ratio: A Revision (December 16, 2010). Contaduría y Administración, No. 236, pp. 29-51, January-April 2012. Available at SSRN: https://ssrn.com/abstract=1726678

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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