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Ranking Investment Projects

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Author Info
James E. Foster () (Department of Economics, Vanderbilt University)
Tapan Mitra () (Department of Economics, Cornell University)
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.

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File URL: http://www.vanderbilt.edu/Econ/wparchive/workpaper/vu01-w07.pdf
File Format: application/pdf
File Function: First version, 2001
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Publisher Info
Paper provided by Department of Economics, Vanderbilt University in its series Working Papers with number 0107.

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Date of creation: Apr 2001
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Handle: RePEc:van:wpaper:0107

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Related research
Keywords: Investment projects; present value; stochastic dominance; polynomials; rate of return over cost; time dominance;

Find related papers by JEL classification:
D92 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Firm Choice and Growth, Investment, or Financing
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
O22 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Project Analysis

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References listed on IDEAS
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.:
  1. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Foster, James E & Shorrocks, Anthony F, 1988. "Poverty Orderings," Econometrica, Econometric Society, vol. 56(1), pages 173-77, January. [Downloadable!] (restricted)
  4. Sen, Amartya, 1975. "Minimal conditions for monotonicity of capital value," Journal of Economic Theory, Elsevier, vol. 11(3), pages 340-355, December. [Downloadable!] (restricted)
  5. Shorrocks, Anthony F, 1983. "Ranking Income Distributions," Economica, London School of Economics and Political Science, vol. 50(197), pages 3-17, February. [Downloadable!] (restricted)
  6. Ekern, Steinar, 1981. "Time Dominance Efficiency Analysis," Journal of Finance, American Finance Association, vol. 36(5), pages 1023-34, December. [Downloadable!] (restricted)
  7. Bohren, Oyvind & Hansen, Terje, 1980. " Capital Budgeting with Unspecified Discount Rates," Scandinavian Journal of Economics, Blackwell Publishing, vol. 82(1), pages 45-58.
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