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Ranking investment projects

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  • James E. Foster
  • Tapan Mitra

Abstract

This paper describes conditions under which one investment project dominates a second project in terms of net present value, irrespective of the choice of the discount rate. The resulting partial ordering of projects has certain similarities to stochastic dominance. However, the structure of the net present value function leads to characterizations that are quite specific to this context. Our theorems use Bernstein's (1915) innovative results on the representation and approximation of polynomials, as well as other general results from the theory of equations, to characterize the partial ordering. We also show how the ranking is altered when the range of discount rates is limited or the rate varies period by period. Copyright Springer-Verlag Berlin Heidelberg 2003

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File URL: http://hdl.handle.net/10.1007/s00199-002-0339-y
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 22 (2003)
Issue (Month): 3 (October)
Pages: 469-494

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Handle: RePEc:spr:joecth:v:22:y:2003:i:3:p:469-494

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Web page: http://link.springer.de/link/service/journals/00199/index.htm

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Web: http://link.springer.de/orders.htm

Related research

Keywords: JEL Classification Numbers: D92; G31; H043; O22.; Keywords and Phrases: Investment projects; Present value; Stochastic dominance; Polynomials; Rate of return over cost; Time dominance.;

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References

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  1. Bohren, Oyvind & Hansen, Terje, 1980. " Capital Budgeting with Unspecified Discount Rates," Scandinavian Journal of Economics, Wiley Blackwell, vol. 82(1), pages 45-58.
  2. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February.
  3. Steinar Ekern., 1980. "Time Dominance Efficiency Analysis," Research Program in Finance Working Papers 105, University of California at Berkeley.
  4. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
  5. J. Hirshleifer, 1958. "On the Theory of Optimal Investment Decision," Journal of Political Economy, University of Chicago Press, vol. 66, pages 329.
  6. Sen, Amartya, 1975. "Minimal conditions for monotonicity of capital value," Journal of Economic Theory, Elsevier, vol. 11(3), pages 340-355, December.
  7. Foster, James E & Shorrocks, Anthony F, 1988. "Poverty Orderings," Econometrica, Econometric Society, vol. 56(1), pages 173-77, January.
  8. Pratt, John W & Hammond, John S, III, 1979. "Evaluating and Comparing Projects: Simple Detection of False Alarms," Journal of Finance, American Finance Association, vol. 34(5), pages 1231-42, December.
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Citations

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Cited by:
  1. John Quah & Bruno Strulovici, 2011. "Discounting, Patience, and Dynamic Decision Making," Economics Series Working Papers 555, University of Oxford, Department of Economics.
  2. Murat Sertel & Arkadii Slinko, 2007. "Ranking Committees, Income Streams or Multisets," Economic Theory, Springer, vol. 30(2), pages 289-289, February.

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