IDEAS home Printed from
   My bibliography  Save this article

Modified Net Present Value (MNPV): A New Technique for Capital Budgeting


  • Kenneth G. McClure

    (Skidmore College, Saratoga Springs, N.Y. USA)

  • Paul Berhanu Girma

    (SUNY, New Paltz,N.Y. USA)


In this paper we show that, when the firm’s opportunity rate of reinvestment is different from its financing rate, the risk-adjusted discount rate method (RADR) of computing Net Present Value (NPV) leads to the same type of incorrect results that required new methodology for modifying Internal Rate of Return (IRR) calculations (i.e. Modified Internal Rate of Return (MIRR)). Specifically, the current method of calculating NPV is biased in favour of (against) high-risk projects and against (in favour of) low-risk projects when the risk-adjusted discount rate is greater (less) than the firm’s average marginal cost of capital (WACC) for two reasons. First, it incorrectly assumes that the reinvestment rate for project cash inflows is the risk-adjusted discount rate of the project instead of the firm’s opportunity rate of reinvestment. Second, it incorrectly assumes that projected cash outflows, for the time periods after the initial outlay, are also discounted at the risk-adjusted discount rate. We propose a new methodology to establish a Modified NPV (MNPV) to eliminate the RADR methodology bias and derive a generalised rate of return (k*) under all combinations of reinvestment and financing rates for a firm. In addition we derive and demonstrate the linkages and consistency between the new MNPV, k*, Profitability Index (PI) and MIRR methodologies.

Suggested Citation

  • Kenneth G. McClure & Paul Berhanu Girma, 2004. "Modified Net Present Value (MNPV): A New Technique for Capital Budgeting," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 7(Special C), pages 67-82, December.
  • Handle: RePEc:zag:zirebs:v:7:y:2004:i:sci:p:67-82

    Download full text from publisher

    File URL:
    Download Restriction: Abstract only available on-line

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item


    capital budgeting; cost inflows; reinvestment rate; total initial outlay;

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zag:zirebs:v:7:y:2004:i:sci:p:67-82. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jurica Šimurina). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.