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A Companion For NPV: The Generalized Relative Rate of Return

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  • Samuel Chiu
  • Enrique Garza Escalante

Abstract

We show how to determine a unique rate, for a particular cash flow stream, that is used only whenever a project demands outside resources to compound the rates of the existing term structure precisely at those times. The net present value of the cash flow stream when discounted with the thus-modified term structure becomes zero. We therefore determine a vector of rates that belongs to the induced space of internal rates of return for that cash flow stream. The rate is applicable under discrete stochastic interest rate representations and provides maximum loan rates that may be contracted only when needed thus keeping a project financially autonomous. (Any investments required may be fully repaid by the project's own cash outflows).

Suggested Citation

  • Samuel Chiu & Enrique Garza Escalante, 2012. "A Companion For NPV: The Generalized Relative Rate of Return," The Engineering Economist, Taylor & Francis Journals, vol. 57(3), pages 192-205.
    • Handle: RePEc:taf:uteexx:v:57:y:2012:i:3:p:192-205
    DOI: 10.1080/0013791X.2012.702198
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    Cited by:

    1. Magni, Carlo Alberto, 2016. "Capital depreciation and the underdetermination of rate of return: A unifying perspective," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 54-79.

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