Mathematical Analysis of Average Rates of Return and Investment Decisions: The Missing Link

The Engineering Economist, 59(3), 175-206.

43 Pages Posted: 8 Jan 2014 Last revised: 14 Nov 2014

See all articles by Carlo Alberto Magni

Carlo Alberto Magni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering)

Date Written: September 18, 2014

Abstract

This paper expands Teichroew, Robichek and Montalbano's (TRM) (1965a, b) rate-of-return model into a complete and general model of economic profitability for investment decision-making. Specifically, TRM's assumptions are relaxed and a project rate of return is derived, expressing the project's overall economic profitability; direct relations among rates, costs of capital and net present value are supplied. The various value drivers are identified and isolated, and the NPV is decomposed into financing NPV and investment NPV. The approach allows for any pattern of financing rates, investment rates, and costs of capital. Relations with old literature and new literature on rates of return are shown: the link between them is obtained by making use of the mean operator (i.e., an affine combinations of rates) and via the one-to-one correspondence between rates and invested capitals.

Keywords: investment analysis, rate of return, net present value, financing, average

JEL Classification: C60, D00, D4, E22, G11, G12, G31, O16, O22

Suggested Citation

Magni, Carlo Alberto, Mathematical Analysis of Average Rates of Return and Investment Decisions: The Missing Link (September 18, 2014). The Engineering Economist, 59(3), 175-206., Available at SSRN: https://ssrn.com/abstract=2374840

Carlo Alberto Magni (Contact Author)

Università degli studi di Modena e Reggio Emilia (UNIMORE) - School of Doctorate E4E (Engineering for Economics-Economics for Engineering) ( email )

Italy

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
160
Abstract Views
1,023
rank
202,358
PlumX Metrics