Capital budgeting with an efficient yield-based method: the real rate of return technique

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Capital budgeting with an efficient yield-based method: the real rate of return technique

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Olivier ROUSSE

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Olivier Rousse

Abstract

We develop a yield-based capital budgeting method that solves the inconsistencies of the internal rate of return (IRR) and its alternatives with the shareholders' wealth maximization objective. We thus provide an efficient technique for managers who exhibit in practice a large preference for comparing the merits of projects with rates of return. This new method, called the real rate of return (RRR), is an improvement of the modified internal rate of return (MIRR) based on the Fisher equation. Simple and fitting with managers' needs and way of thinking, the RRR has all the qualities to be accepted in practice.

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Publisher Info
Paper provided by CREDEN (Centre de Recherche en Economie et Droit de l'Energie), Faculty of Economics, University of Montpellier 1 in its series Cahiers du CREDEN (CREDEN Working Papers) with number 08.02.73.

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Length: 20 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:mop:credwp:08.02.73

Contact details of provider:
Postal: Université de Montpellier 1, Faculté des Sciences Economiques, CREDEN, Av. de la Mer - Espace Richter, CS 79606, 34960 Montpellier Cedex 2, France
Phone: 33 (0)4 67 15 83 60
Fax: 33 (0)4 67 15 84 04
Web page: http://www.creden.univ-montp1.fr
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For technical questions regarding this item, or to correct its listing, contact: (Olivier ROUSSE).

Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-04-29 (All new papers)
NEP-PPM-2008-04-29 (Project, Program & Portfolio Management)

References listed on IDEAS
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James H. Lorie & Leonard J. Savage, 1955. "Three Problems in Rationing Capital," Journal of Business, University of Chicago Press, vol. 28, pages 229. [Downloadable!]
Dirk Brounen & Abe de Jong & Kees Koedijk, 2004. "Corporate Finance in Europe: Confronting Theory with Practice," Financial Management, Financial Management Association, vol. 33(4), Winter.
McDaniel, William R & McCarty, Daniel E & Jessell, Kenneth A, 1988. "Discounted Cash Flow with Explicit Reinvestment Rates: Tutorial and Extension," The Financial Review, Eastern Finance Association, vol. 23(3), pages 369-85, August.
Brounen, D. & Jong, A. de & Koedijk, C.G., 2004. "Corporate Finance In Europe Confronting Theory With Practice," Research Paper ERS-2004-002-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
Ezra Solomon, 1956. "The Arithmetic of Capital-Budgeting Decisions," Journal of Business, University of Chicago Press, vol. 29, pages 124. [Downloadable!]
Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May. [Downloadable!] (restricted)

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Olivier Rousse, 2008. "On the bias of yield-based capital budgeting methods," Economics Bulletin, Economics Bulletin, vol. 7(9), pages 1-8. [Downloadable!]

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