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Capital rationing: The general case and a better criterion for ranking

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  • Hoi Wong

Abstract

The definition of net present value implies that the reinvestment rate of return on the intermediate cash flows is equal to the risk-adjusted discount rate of the project. However, in many situations, the two rates are different. Therefore, in capital rationing, the ranking of projects based on net present value is incorrect in those situations. Another problem is that financial managers would prefer to use internal rate of return for ranking, although ranking by net present value is theoretically superior. This paper solves both problems by developing a new ranking criterion. Copyright Springer 2000

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  • Hoi Wong, 2000. "Capital rationing: The general case and a better criterion for ranking," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 24(1), pages 90-96, March.
    • Handle: RePEc:spr:jecfin:v:24:y:2000:i:1:p:90-96
    DOI: 10.1007/BF02759698
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    1. Ariel, Robert, 1998. "Risk Adjusted Discount Rates and the Present Value of Risky Costs," The Financial Review, Eastern Finance Association, vol. 33(1), pages 17-30, February.
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