IDEAS home Printed from https://ideas.repec.org/p/col/000463/010993.html

Aggregate Return on Investment for Investments under Uncertainty

Author

Listed:
  • Carlo Alberto Magni

Abstract

This paper deals with with capital budgeting decisions under uncertainty. We present an Aggregate Return On Investment (AROI), obtained as the ratio of total (undiscounted) cash flow to total invested capital and show that it is a genuine rate of return which, compared with the risk-adjusted cost of capital, correctly signals wealth creation. The AROI exists and is unique and, for two mutually exclusive projects, we derive an incremental AROI and an incremental risk-adjusted cost of capital, by means of which two unequal-risk projects can be correctly compared. Iterating the incremental procedure, we show that the AROI approach correctly ranks any bundle of different-risk competing projects.

Suggested Citation

  • Carlo Alberto Magni, 2014. "Aggregate Return on Investment for Investments under Uncertainty," Proyecciones Financieras y Valoración 10993, Master Consultores.
    • Handle: RePEc:col:000463:010993
    as

    Download full text from publisher

    File URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2335148
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. is not listed on IDEAS
    2. Haktanır, Elif & Kahraman, Cengiz, 2023. "Intuitionistic fuzzy risk adjusted discount rate and certainty equivalent methods for risky projects," International Journal of Production Economics, Elsevier, vol. 257(C).
    3. Wilson, William W. & McKee, Greg & Nganje, William & Dahl, Bruce & Bangsund, Dean, "undated". "Economic Impact of USWBSI’s Scab Initiative to Reduce FHB," Agribusiness & Applied Economics Report 264672, North Dakota State University, Department of Agribusiness and Applied Economics.
    4. Erio Castagnoli & Gino Favero, 2025. "A contribution to the NPV-IRR debate," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 48(1), pages 153-174, June.
    5. Cuthbert, James R. & Magni, Carlo Alberto, 2016. "Measuring the inadequacy of IRR in PFI schemes using profitability index and AIRR," International Journal of Production Economics, Elsevier, vol. 179(C), pages 130-140.
    6. Dean Altshuler & Carlo Alberto Magni, 2015. "Introducing Aggregate Return on Investment as a Solution to the Contradiction Between Some PME Metrics and IRR," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 15209, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    7. 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.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    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:col:000463:010993. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ignacio Velez (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.